Gaining Clarity in an Uncertain Market

In 2025, the investment landscape has been characterized by a series of unpredictable policy changes, causing significant market disruption due to hastily executed tariffs. These tariffs have been continuously altered through raises, suspensions, renegotiations, or legal halts, making the investment environment more challenging for investors.

“…the safest course is to remove as much guesswork as possible from asset allocation….”

In the face of such uncertainties, a sound investment strategy is to concentrate on sectors of the market that still offer good visibility. Despite the prevailing uncertainty, there are specific areas of opportunity offering high conviction. Currently, these areas include two that are policy-driven and a third that is more idiosyncratic.

Improving Outlook for Banks Thanks to Deregulation and Steepening Yield Curve

The first area of opportunity emanates from the improved prospects for the financial sector. This improvement is due to a more favorable regulatory environment and a steepening yield curve. The Trump administration is keen on rolling back significant measures introduced following the 2008 global financial crisis. Additionally, federal regulators have reduced bank exams and enforcement actions, while the Federal Reserve has delayed implementing the “Basel III Endgame” reforms and plans to lower the capital requirements proposed by the previous administration.

“Lower capital requirements would free up hundreds of billions of dollars for banks….”

By reducing capital requirements, banks would have more funds for lending, stock buybacks, dividends, or acquisitions. Reduced compliance rules would bring down costs and offer more balance sheet flexibility. As a result, banks would likely engage in more lending and trading activities, which would boost returns.

The steepening yield curve also supports financials. A steep yield curve benefits banks as it widens the spread between the short-term borrowing rate and the long-term lending rate (known as net interest margin), thereby enhancing their profitability. The combination of deregulation and large fiscal deficit spending puts upward pressure on the long end of the yield curve, whereas the Fed is expected to cut rates on the short end. This scenario foretells a sustained steepening of the curved—an environment favourable for banks.

Fiscal Impulse and Absence of Austerity Likely to Fuel Inflation

The second theme revolves around federal deficit spending. President Trump’s “Big Beautiful Bill,” which details his tax and spending policies, is expected to add around USD 3 trillion to the federal deficit over the next decade. This spending is poised to stimulate the economy and maintain inflationary pressure.

Rising prices due to inflation compel consumers to spend more on goods and services. This scenario benefits credit card companies since they earn a percentage of purchases through charges. As the dollar volume of transactions grows, card issuers earn more in interchange fees.

Inflation can also be beneficial for leading insurance companies. Inflation increases the cost of claims, enabling insurers to raise premiums on new or renewed policies to account for higher replacement costs. This is particularly true for insurance firms specializing in flexible pricing, such as commercial insurance and specialty insurance.

Desirable “Sandboxes” Reduce Investment Guesswork

The third strategic area of opportunity is not tied to a specific policy but to a concept referred to as the “sandbox.” The central question here is whether an investment will be just as attractive or even more so, three to five years from now. If the answer is yes, then a favorable sandbox has been identified.

While it’s desirable for a sandbox to be insulated from negative downstream policy impacts, this is not always the case, especially in a volatile political environment. The key to finding a good sandbox is to identify potential long-term changes before they occur and determine their likely impact on the industry.

Long-term Strength in AI, but Near-term Visibility Is Slightly Murky

Looking ahead, the rise of artificial intelligence (AI) is another “knowable” area of the market, but with a few caveats. Despite the undoubted long-term potential of AI, questions persist about the durability of the current cycle. In the short-term, major chip manufacturers are expected to remain highly profitable, with AI capital expenditure (capex) continuing at a brisk pace. However, to maintain this spending trajectory, chip purchasers will need to demonstrate improved return on investment through the deployment of AI agents and other incremental revenue streams.

Despite being strong believers in AI as a transformative, multi-decade secular growth story, it is critical to guard against the market entering a frenzy of “irrational exuberance” at a time when future chip demand is at a crossroads. A disciplined approach to stock-picking that can identify attractive opportunities in this theme, while also detecting signs of froth indicating an asymmetric risk/return relationship, is the best way to navigate this situation.