Q3 2025 Investment Outlook: From Trade War to Economic War

Q3 2025 Investment Outlook: From Trade War to Economic War

Mon Jun 09 2025

Dear readers,

We’re now entering Stage 2 of the US–China conflict—no longer just a trade war, but a slow-burning economic war that’s reshaping global supply chains, strategic alliances, and investment flows

This new phase will likely continue to weigh on global growth, not through shock events, but through a steady erosion of trust, cooperation, and economic interdependence.

Why “Decoupling” Fails Here

Neither side can afford to escalate too far—but neither can walk away:

The US is more dependent on China than it admits.
Rare earths are just the surface. According to the DoE 2024 report, ramping US production is still 5-7 years away. Raw mining, processing/refining, as well as magnet production continue to be key supply chain chokepoint vulnerabilities. For example,Lithium-6, used to enhance uranium for small modular reactors (SMRs), is critical for US defense and energy—yet it’s only produced at scale in China. (For those who are interested, you can read more in the appendix).

1. China still needs access to US markets.
   US remains China’s number one single country-export destination, with additional indirect exposure via exports to US allies (e.g. Mexico, Vietnam) for final assembly/re-export to the US. Despite the “decoupling” rhetoric, almost 1 in 4 export dollars is exposed (both directly and indirectly) to the US. China’s manufacturing economy is dependent on access to US markets, otherwise widespread factory shutdowns will be devastating to the economy.
2. Both sides know decoupling is dangerous.
   Expect a repeated cycle: one step forward, half a step back. Headlines may suggest progress, but stalemate dynamics will continue.
3. Currency diversification will accelerate.
   With growing distrust in US-centric systems, diversification away from the USD is picking up. This adds further drag on global growth, as capital reallocates cautiously across fragmented zones.

• Safe haven flows are likely to benefit Japan, Switzerland, Singapore, and to some extent onshore China.
• This currency realignment won’t be smooth—but it will be persistent.

What We Should Be Doing

There are still areas where capital can be put to work:

1. Commercial Paper (CP): Still productive for both sides.
   Strong demand and consistent issuance make CP an efficient way to capture yield in a risk-managed environment.
2. Structured Products (SP): Volatility creates opportunity.
   With geopolitical and FX volatility rising, SPs remain a smart way to monetize market swings and offer targeted risk-reward.
3. Hedge Funds: Buy the dips.
   Many hedge funds are defensively positioned. Q3 dislocations could offer good entry points, especially into funds with macro, relative value, or volatility strategies.
4. Private Equity: Still cooling.
   Deal flow remains slow. Valuations haven't reset enough, and GPs have raised too much money to deploy meaningfully. Secondaries is a good alternative way to consider entering the PE market.
5. Private Credit: Quiet accumulation.
   As some investors throw in the towel and pull back from risk assets, they’re finding comfort in private credit. Expect more inflows into credit funds offering yield with structural protections.

Closing Thoughts

We’re in the early innings of a long-term geopolitical-economic reshaping. Investors must adapt to a slower, more fragmented world. Q3 is not about chasing growth—it's about navigating a multi-speed, multi-polar world. The shift away from the US dollar, the rise of safe haven zones, and ongoing US–China frictions will shape capital flows more than earnings or inflation prints.

Danny Toe