Summary
1. Short term pain vs long term gain? The Strait of Hormuz remains largely closed. The markets have so far focused on strong earnings prospects while the economy draws down oil inventories at a record pace. Reduced imports from China and increased exports from the US have helped to keep energy prices relatively muted. This can´t last forever and oil inventories could reach “Operational Stress Levels” as early as June. This would force equity markets to re-evaluate the current optimistic stance.
2. Operation Epic Earnings: equity markets have showed remarkable resilience of late. A major driver of this rebound has been earnings expectations which have continued to improve since the beginning of the year. Once again, growing AI capex projections have fuelled ongoing optimism. Even in Europe, earnings estimates have increased modestly, mainly driven by positive revisions in energy and tech.
3. Keep calm and book profits. Within Europe, the UK market has been a long-term favorite. The FTSE 100 produced 2.8% relative outperformance versus the Euro STOXX over the last 12 months. Due to ongoing political turmoil, rising yields and weak results of certain major index constituents, we cut the UK to Neutral.
4. Sector update: US cyclical sectors continue to perform well, supported by a resilient economy. Additionally, many cyclicals are benefiting from the infrastructure boom, particularly in AI-related investments. Globally, Healthcare continues to offer significant upside potential., particularly in innovative areas like biotech. European banks could also see a rebound, as their valuations are attractive again.
5. AI Infrastructure: Artificial Intelligence — specifically the resources and infrastructure required to power it — remains a key conviction.