House View

Equities

Despite heightened geopolitical uncertainty resulting from the conflict, the outlook for equities remains broadly positive, albeit somewhat less than previously. Markets have so far reacted only modestly, with share prices underpinned by solid corporate earnings.

Our preferred regions are the US, Japan and emerging markets, where growth prospects remain relatively resilient. Europe appears less attractive by comparison.

Government bonds

The energy-price shock creates mixed forces for government bonds. Higher inflation typically drives yields upward, while weaker growth supports demand for safer assets. These offsetting dynamics lead to a neutral stance on duration overall. However, there is an expectation that yield curves could steepen as investors factor in longer-term fiscal pressures.

Credit

The outlook for corporate bonds is less favourable. Credit spreads remain relatively tight despite increased uncertainty, meaning investors are not being sufficiently compensated for rising risks. With both duration risk and spread risk elevated, the risk-reward balance looks unattractive. As a result, the preferred positioning is underweight corporate bonds, particularly in lower-quality market segments.

1. Resilient growth challenged

Entering 2026, we had expected economic growth to strengthen modestly as lower interest rates supported housing and investment, aided further by accelerated spending on AI infrastructure and fiscal stimulus.

Yet this resilient backdrop now faces tests: tariffs, protectionism, fragmented supply chains, political risks and labour strains. Financial markets remain vulnerable given tight credit spreads and high equity valuations, especially given geopolitical tensions and the threat of higher oil prices. Overall, our expectation of a global growth revival is delayed until 2027.

2. Inflation pressures re-emerging

Inflation was easing toward central banks’ two per cent targets at the start of the year, allowing many G10 policymakers to cut interest rates. However, the conflict has not only driven energy prices higher but raised concerns over chemical and fertilizer supplies. Near-term CPI readings will be higher, and the risk of a more disruptive supply shock can lift overall inflation substantially.

At the same time, the AI boom is increasing demand for semiconductors, power and infrastructure, pushing up some costs. Energy dependency in Europe and Asia, along with higher food and energy weights in emerging-market inflation baskets, amplifies inflation risks in those regions. If energy shocks lift broader price expectations or wages, central banks may delay or limit further rate cuts.

3. Fragmentation in financial markets and economies

The post–Cold War vision of a unified global system has weakened as geopolitical tensions have risen. These tensions are driving selective decoupling of economies and sectors, particularly in technology and strategic resources. The international rules-based order that once supported globalisation and integrated supply chains is eroding, with institutions like the World Trade Organization (WTO) being undermined and broader multilateral cooperation becoming less reliable.

Instead, smaller alliances of like-minded countries are emerging. This fragmentation could lead to higher defence spending, resource nationalism, technology restrictions and duplicated supply chains prioritising security over efficiency. For investors, a less predictable and more regionalised global economy may increase market volatility and reshape capital flows.

4. Market Rotation

Market rotation reflects shifting investor sentiment rather than changes in the number of securities outstanding. The current shift marks a move from narrow, technology-led equity gains toward broader leadership, particularly in cyclical sectors such as industrials and basic resources. These sectors benefit from rising capital expenditure linked to AI infrastructure, energy transition, defence spending and supply-chain security.

While technology sector valuations already reflect strong optimism, cyclical stocks are entering a new earnings cycle after a period of weak profits. A major risk to this rotation would be a prolonged energy shock, which could raise costs and weaken demand. Regionally, the US remains favoured, with continued strength expected in Japan and emerging markets.