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Podcast: CIO's Dirk Effenberger on managing geopolitical risks (10 min)

Markets are entering the fourth quarte r of 2025 with uncertainty. The US government has shut down after the final vote on a stopgap spending bill failed to pass the Senate on Tuesday evening. US President Donald Trump has added new tariffs on imported timber and lumber, while the Wall Street Journal reported that the administration is considering a tariff scheme to incentivize chipmakers to invest in domestic manufacturing. S&P 500 futures are pointing 0.7% lower ahead of the US market open on Wednesday, after gaining 3.5% in September amid optimism over the Federal Reserve’s policy easing.

In addition to the temporary furloughs of hundreds of thousands of federal employees, the immediate concern for investors is the suspension of certain government data releases that are crucial in assessing the health of the US economy and the Fed’s pace of further easing. Depending on the length of the shutdown this time, these data points could include September’s labor report, which is due this Friday, and the consumer price index in two weeks’ time.

Market volatility may be expected in the coming days and weeks. But the macroeconomic effects of shutdowns have historically been minimal and quickly reversed. Investing is best approached with a long-term perspective, in our view, and the fundamental drivers that have powered markets this year remain intact.

We do not expect temporary data delays to deter the Fed from cutting interest rates further, corporate and aggregate household balance sheets are in good shape, and transformational innovation is still key to long-term returns.

We maintain the view that retaining a resilient portfolio is essential for navigating near-term uncertainties and meeting long-term financial goals. We offer several guidelines for investors against the current backdrop.

Put cash to work in higher-yielding market segments. The Job Openings and Labor Turnover Survey (JOLTS), released Tuesday, showed higher available positions and limited layoffs in August. However, hiring decreased, and the job-to-jobless ratio slipped to the lowest since April 2021. With the quits rate, a key measure of worker confidence, also falling to the lowest level since the start of the pandemic, the survey points to continued softening of the labor market. We expect the Fed to press ahead with additional interest rate cuts despite a temporary delay in data releases, and believe investors should limit cash holdings to those needed for near-term expected portfolio withdrawals. Quality bonds have historically outperformed cash after rate peaks, while select credit opportunities in Asia and Europe may offer higher returns. Investors can also consider ways to replace income with equity income or yield-generating structured strategies.

Focus on transformational innovation, which we expect to outperform broader markets. Artificial intelligence (AI) cloud provider CoreWeave said it has signed a USD 14bn agreement with Meta to supply computing power through December 2031, the latest multi-billion-dollar deal in the AI space as demand for AI infrastructure sees no signs of slowing. Without taking any single-stock views, we expect structural growth trends of AI, power and resources, and longevity to drive over 50% of global corporate profit growth in the next decade. With innovation an important feature of enduring market leaders, investors should view near-term market dips as compelling entry points to build long-term exposure. Those looking to manage timing risks should consider phasing-in strategies.

Seek diversification from gold and alternatives. Gold’s strong rally this year demonstrates its role as an effective portfolio hedge and diversifier amid political, economic, and geopolitical uncertainty. With low correlation to equities and bonds, as well as strong demand from investors and central banks, we view a mid-single-digit portfolio allocation to bullion as optimal. Exposure to alternatives like hedge funds and private markets could also enhance portfolio resilience, in our view, as they can improve diversification while offering growth potential and downside protection. Investors should be aware of the various risks inherent in investing in alternatives, including illiquidity.

So, as evidenced by the market performance over the past two quarters, staying invested has paid off. We expect markets to stay supported by solid fundamentals, and see several ways investors can boost portfolio resilience.