US-Iran negotiations and Strait of Hormuz reopened: with more and more tankers exiting the Strait, oil prices have returned to pre-conflict levels around USD70. Energy costs should be a disinflationary force sooner rather than later, now reflected in lower bond yields. Downgrade to Neutral on eurozone government bonds following post-agreement yield compression.
How persistent is inflation? US inflation has remained above the Fed’s 2% target for 5 years, supported by the AI investment boom and persistent service inflation. However, US consumer demand is fragile, and wage growth is limited. We see only 1 Fed rate hike to come in December, rather than a new rate hike cycle.
Stock bull market health depends on rates, liquidity: 10-year US bond yields below 4.5% and continued growth in global money supply are key supports for stocks, alongside bullish earnings trends. Neutral on equities, favour Japan, US small-caps and Latin America.
Sector rotation away from Mag 7: since November, hyperscalers have increasingly underperformed as fears over AI capex funding and eventual profitability have grown. Favour rotation away from US Big Tech to value-oriented exposure in Banks, Mining, Healthcare.
Value in vogue: since the end of March, value stocks in the US, Europe and Emerging Markets have all outperformed broad index benchmarks. For investors looking to diversify away from tech-heavy growth stock exposure, value-oriented ETFs and funds are excellent choices.
Edmund Shing
Chief Investment Officer
