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Post Middle-East conflict, investors are facing a very different landscape. Economies are still digesting an energy shock, with its inflation and growth constraints. Oil markets have changed. But the impacts look globally manageable. The world economy has proved resilient and the outlook has slightly improved.
The US economy has been stronger than expected, supported by a stable job market. As this is no longer a concern for the Federal Reserve, it can focus more on price stability. Despite above-target inflation, the Fed should keep policy rates on hold through the second half, depending on how fast inflation declines. However, rate hikes are now more likely than cuts in the medium term.
The capex cycle is still driving US growth, but real household incomes are declining and any new import tariffs would weigh on activity.
The world economy has proved resilient and the outlook has slightly improved
In Europe, governments are scaling back their fiscal spending with EU funding winding down. Still, Germany’s fiscal expansion should offset this to some extent. Meanwhile, political uncertainties in the UK will create some volatility.
Across Asia and some emerging markets, strength in the technology cycle has offset oil market disruptions. China and Japan have used oil reserves and subsidies to shore up growth.
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Of course, the Middle East situation can re-escalate, but for now, our base case holds. We are in an economic expansion and recession risks are low. This is a strong cycle driven by unprecedented investments as nations seek to ensure economic security and autonomy. And now this recalibration continues through shifts in energy markets and technology.
In financial markets, a key pressure point is easing. A recovery in Hormuz shipping is reducing strain on energy. As a result, oil prices, inflation and bond yields will all decline over the next months. For markets, monetary policy and liquidity should remain supportive. A normalisation in interest rates and volatility will support equities. This creates favourable conditions for risk assets, and we maintain our pro-risk stance.
For markets, monetary policy and liquidity should remain supportive
In equities, we stay overweight. Earnings remain strong, and continue to be revised upwards into 2027. So far, the rally has been concentrated in technology, with much attention on IPOs. But from here, we expect performance to broaden. After a strong run, the outlook for tech is more neutral, while cyclical sectors should recover. We favour financials, alongside healthcare and utilities.
Where do we see the strongest opportunities? Emerging markets continue to stand out, with a stronger earnings momentum and more attractive valuations than in developed markets.
In fixed income, we have raised exposure to global government bonds to neutral, locking in high yields as price pressures ease. The most compelling income opportunities, however, remain in emerging market hard-currency debt.
In currencies, a stable Fed outlook and resilient US economy should support the US dollar. We therefore take a neutral view on the dollar against lower-yielding developed currencies such as the euro or Swiss franc, while staying positive on higher-yielding currencies, including emerging markets.
Markets enter the second half of the year having absorbed conflict, an energy shock and inflation concerns. We remain positive on risk assets, but risks remain, including inflation, a more hawkish Fed, geopolitical tensions, and policy shocks such as tariffs. We stay vigilant.
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