Market Relief Faces Headwinds as Trade Tensions Persist

Cameron Systermans, senior investment strategist at Mercer, has warned that recent optimism in global markets may be misplaced. In an interview with Bloomberg, he cautioned that “market relief is a little bit premature” due to unresolved trade tensions, particularly the escalating U.S.-China tariff war. While negotiations continue, the lingering uncertainty around tariffs—now reaching historic highs—threatens to undermine economic stability and investor confidence.

The Trade Tension Quagmire

The U.S. imposed a 145% tariff on Chinese imports in April 2025, combining existing levies with new “reciprocal” duties, while China retaliated with 125% tariffs on U.S. goods. These measures mark a dramatic escalation from 2024 levels, with tariffs now averaging 54% higher on Chinese exports to the U.S. compared to pre-2025 baselines. Even if future negotiations reduce these rates, the cumulative impact on global supply chains, inflation, and corporate profits remains severe.

The ripple effects are already visible. Tesla, for instance, has reported delays in its Optimus robot production due to China’s restrictions on rare earth exports—a critical input for advanced manufacturing. show a 25% decline since early 2025, reflecting investor anxiety over supply chain disruptions.

Japan: A Bright Spot in a Darkening Landscape

Amid the gloom, Systermans highlights a rare source of optimism: Japan. The yen, long battered by negative interest rates and trade deficits, is now poised for a comeback. Three tailwinds are at play:
1. Interest Rate Normalization: The Bank of Japan (BoJ) is gradually raising rates toward a neutral target of 1% by 2025, narrowing the gap with U.S. and European central banks.
2. Valuation: The yen is “exceptionally cheap” compared to its fair value, with Mercer estimating it is undervalued by 15-20%.
3. Economic Resilience: Japan’s nominal GDP is projected to grow at 3% annually—its fastest pace in decades—driven by rising wages (up 4% in 2024) and corporate capital spending.

shows the yen gaining 12% against the dollar since early 2025, a trend Mercer expects to continue.

Navigating the Global Growth Crossroads

Systermans’ analysis underscores a “Swing State” dynamic in 2025:
- Developed Markets: Central banks are cutting rates to neutral levels (e.g., 3.5% in the U.S., 3% in the UK), but lagged effects of prior hikes will keep growth muted. The eurozone faces prolonged stagnation due to weak consumer demand.
- China: Deflationary pressures loom, with core inflation near zero. A self-reinforcing slump in property markets and consumer spending risks pushing growth below 4%, a level not seen since the 1990s.
- Emerging Markets (EM): Redirected trade flows from China benefit Asian exporters (e.g., Taiwan, South Korea) and commodity producers (e.g., Brazil, Chile). However, EM currencies remain vulnerable to a stronger U.S. dollar if tariffs intensify.

Investment Strategy: Opportunistic Yet Cautious

Mercer’s asset allocation advice reflects this duality:
- Equities: Overweight Japanese stocks (e.g., Toyota, Sony) and REITs, which benefit from yen strength and corporate capital spending. Maintain a neutral stance on EM equities pending trade clarity, while underweighting U.S. equities due to tariff risks.
- Fixed Income: Favor Frontier Market Debt (e.g., Nigeria, Egypt) and Asian High Yield bonds for their attractive yields and low default rates. Underweight global high yield due to tight spreads.
- Currencies: Overweight the yen against non-U.S. currencies, and hedge USD exposure given the risks of tariff-driven volatility.

Risks and Tailwinds

• AI’s Dual Impact: While AI could boost productivity and corporate profits, automation risks exacerbating wage stagnation and deflation.
• Geopolitical Volatility: U.S.-China tensions show no sign of easing, with Trump’s administration threatening further tariffs on semiconductors and critical minerals.

Conclusion: Prepare for a Bumpy Ride

Systermans’ analysis paints a world where policy choices and geopolitical shifts will determine outcomes. Markets may experience “relief rallies” on temporary truces, but the path to sustained stability is fraught with risks. Key data points reinforce this outlook:
- Trade tensions have cost the global economy an estimated $500 billion since 2018, per Mercer’s calculations.
- Japan’s nominal GDP growth of 3% contrasts starkly with China’s fragile 4% trajectory, underscoring a divergence in economic health.
- Frontier Market Debt (FMD) yields remain 5-7% higher than U.S. high yield bonds, offering a compelling risk-adjusted trade.

Investors must balance short-term risks—such as tariff-driven inflation and deflationary pressures—with long-term opportunities in Japan and EMs. As Systermans advises, “Flexibility is key.” In this “Swing State” world, portfolios must be ready to pivot swiftly to navigate the stormy seas of 2025.