Investment Monthly: Differentiation matters as the market rally continues

• While expectations of a lasting ceasefire and strong earnings results pushed markets to rebound in April, we will keep an eye on vulnerable markets. Meanwhile, the full impact on growth and inflation is also yet to be seen.
• That said, we believe significant government and corporate investments in AI, defence and energy independence should keep the global economy going, supporting margins and earnings. However, until a final deal is reached, market consolidation, especially in cyclical sectors, may persist.
• Both the commitment to high capital expenditure and the rapid monetisation of these investments should foster optimism over the long-term market outlook. We maintain a multi-asset strategy across asset classes, sectors, regions and currencies. While bonds and gold are not perfect diversifiers in complex market conditions, they remain essential in diversified portfolios for managing downside risks. Our exposure to alternative assets has worked well, given their lower correlation with traditional assets.

• As higher energy prices have raised inflation expectations and bond yields since the Middle East conflict in March, it is important to differentiate winners from losers based on the relative impact of energy prices.
• Geographically, we prefer the US to Europe, and North Asia to South Asia, given that the US is an oil exporter, while mainland China has managed its reserves carefully, and Hong Kong benefits from it. From a sector perspective, we remain overweight on energy and underweight on consumer staples across regions.
• On the bond side, elevated oil prices linked to supply-chain disruption are limiting the Bank of England’s flexibility to ease policy. Uncertainty over government leadership and fiscal credibility has put further pressure on UK gilts, leading us to downgrade gilts to neutral and reduce the duration of GBP investment grade to medium (5-7 years), in line with the benchmark. We also anticipate that policymakers in the Eurozone will focus on mitigating similar risks. As a result, we now expect three 0.25% rate hikes by the ECB and two 0.25% rate hikes by the Bank of England by the end of 2026 (we foresee no hikes by the US Fed). We remain overweight on EUR investment grade credit, with a medium-to-long duration preference.

• The US-China summit concluded with a potential tariff reduction in “non-critical and non-strategic" areas, which account for around 10% of US imports from China. Additionally, China has committed to purchasing aircraft, energy products and agricultural goods. The establishment of a Board of Investment is expected to boost China’s overseas direct investment (ODI) in the US. The summit has helped restore some degree of business confidence and is aligned with China’s pro-growth stance. The improved bilateral relations further reinforce our bullish view on Chinese equities.
• Hong Kong should be well-positioned to benefit from mainland China’s positive market outlook. Driven by increased consumption and investment, Hong Kong’s Q1 GDP rose by 5.9% y-o-y, marking the fastest pace of growth since Q2 2021. The economy continues to demonstrate resilience, supported by energy mainly imported from mainland China, government support for AI, and projects such as the North Metropolis. Attractive valuations, liquidity inflows, increased IPO activity and an improved outlook for consumption and the property market remain positive for Hong Kong equities.

▲ Overweight

Despite ongoing geopolitical uncertainty and inflation concerns, we expect global equities to remain supported by resilient earnings and structural growth drivers. The US and Asia remain our top picks.

▲ Overweight

The macro backdrop is supported by economic resilience, structural growth drivers in AI and innovation, and a stable labour market. Q1 earnings growth remains strong, led by Technology and Communications, keeping valuations supportive.

▶ Neutral

The value style of UK stocks offers global diversification, but growth is challenged by subdued consumer confidence, stagnant house price growth and lower job vacancies. Political uncertainty has added another layer of uncertainty.

▼ Underweight

Despite improving earnings momentum and attractive valuations, the region continues to face energy-related challenges as an oil importer. We prefer most European markets over France.

▶ Neutral

While policy stimulus, corporate governance reforms and AI development remain positive drivers, higher energy prices are impacting profit margins, leading to a more conservative earnings outlook. Valuations appear less attractive.

▶ Neutral

While fundamentals remain resilient, elevated energy prices remain a headwind for oil-importing markets. 

▶ Neutral

The region’s improving structural fundamentals are clouded by the impact of the Middle East conflict in the near term.

▶ Neutral

Elections offer two-way risks, but stronger commodity prices and trade flows with China are supportive.

▲ Overweight

Asia continues to offer strong structural growth opportunities, backed by expanding AI ecosystems and policy support, and benefits from supply chain realignment as trade and investment intensify.

▲ Overweight

With undemanding valuations and a sustainable pro-growth policy stance, we remain positive on Chinese stocks. Favourable fiscal policies, liquidity support and new financing policy tools will continue to drive innovation and domestic consumption. 

▼ Underweight

While valuations have moderated, weak investor sentiment due to higher oil prices and limited exposure to the AI investment cycle weigh on performance. We favour large-cap stocks, preferring the financials and industrials sectors.

▲ Overweight

Strong Q1 GDP growth of 5.9% y-o-y has raised our full-year forecast to 3.8% for 2026 (previously 2.7%). We prefer banks, insurance, telecom and utilities offering stable income, and developers with strong balance sheets and competitive positions.

▲ Overweight

Reasonable valuations and attractive yields, along with the presence of large and profitable banks, improving shareholder returns and supportive regulatory initiatives, remain tailwinds for the equity market.

▲ Overweight

South Korea offers strong exposure to technology and AI, while corporate governance reforms remain a positive driver.

▶ Neutral

Despite improved performance driven by high exposure to AI and semiconductors, valuations and earnings momentum remain less competitive than regional peers.

▶ Neutral

Markets now see less scope for rate cuts amid higher inflation expectations. We expect government bond yields to trade within a range and downgrade UK gilts to neutral.

▶ Neutral

Given the mandate to manage inflation while maintaining full employment, we believe the Fed will keep the federal funds target range unchanged through 2026 and 2027. Yields are likely to remain range bound in the near term.

▶↓ Neutral

With higher inflation risk, we now expect two 0.25% policy rate hikes in 2026. Uncertainty over government leadership and fiscal credibility has put UK gilts under pressure, leading us to downgrade UK gilts to neutral.

▶ Neutral

Amid higher inflation expectations, we now expect the ECB to hike rates three times this year.

▶ Neutral

A strong directional stance on JGBs is unlikely amid elevated inflation expectations and heightened growth uncertainty, while near-term range-bound trading and curve volatility are likely to persist. 

▲ Overweight

There is still scope for selective EM rate cuts. The USD may see renewed weakness versus some EM currencies. Yields are attractive and rating upgrades are possible.

▶ Neutral

The US dollar could remain volatile. While yields remain attractive, we focus on quality bonds.

▲ Overweight

We focus on coupon income rather than capital gains and continue to favour investment grade credit for its attractive yields and diversification benefits.

▲ Overweight

While overall yields are still attractive, we keep our preference for medium duration (5-7 years).

▲ Overweight

The medium-to-long duration of EUR investment grade credit still offers a more attractive risk-return trade-off.

▲ Overweight

We cut our duration exposure from medium-to-long (7-10 years) to medium (5-7 years) to reflect a neutral stance on duration.

▲ Overweight

Backed by sovereign ownership and robust local demand, Asian credit has shown resilience and continues to offer attractive yields. We prefer Australian IG bonds, Asian financials and Chinese hard currency bonds.

▼ Underweight

Signs of some stress in credit markets are emerging, and potential spread widening if equity volatility picks up remains a headwind for high yield bonds. 

▼ Underweight

Despite a below-average default rate and a resilient economic outlook, spreads do not sufficiently compensate for the risks.

▼ Underweight

Europe’s large oil imports and the low share of energy companies in the high yield space make the asset class vulnerable.

▼ Underweight

Credit spreads have widened as risk sentiment has soured recently. Quality credit offers a more attractive risk-reward profile.

▼ Underweight

Less attractive valuations and increased spread volatility reinforce our cautious stance on Asian high yield.

▲ Overweight

Gold continues to offer diversification benefits and potential upside, making it an essential component to build portfolio resilience amid market uncertainty. Central banks continue to diversify their currency exposure by adding to gold holdings.

▶ Neutral

Oil prices remain elevated and volatile as they move with the news flow.

The consumer discretionary segment is under pressure due to geopolitical events, higher energy and labour costs, competition, and a weaker pricing environment. As inflationary pressures build, interest rates may rise, further hurting sentiment. Airlines and travel companies have raised prices to offset higher fuel prices, potentially weighing on demand. The hospitality segment is seeing some signs of reduced bookings. In contrast, electric vehicle demand has risen sharply in many markets as consumers look to mitigate higher fuel prices.

Market sentiment is mixed this year even though results have been above market expectations. Volatile capital markets have favoured trading activities, while corporate advisory (M&A and IPOs) and debt issuance businesses are also booming. Net interest income may stay elevated, with an upside risk that interest rates may be raised further to combat inflationary pressures. The insurance sector outlook is more mixed, given the rise in weather-related and other catastrophic events.

Industrials are benefitting from the multi-year roll-out of new technologies, including infrastructure (energy, digital and AI), aerospace, defence, electric transportation, automation and robotics. Order books continue to grow, with companies committing capital to new and upgraded production. Limited excess capacity is providing a supportive pricing environment. Tariff concerns have eased considerably.

Despite a sustained period of underperformance, strong quarterly results and growth forecasts in the US continue to exceed the rest of the market. Valuations are particularly attractive, with the sector now trading in line with the broader equity market rather than at a historical premium. Demand for AI software, related hardware and semiconductors is driving robust growth as companies in every sector deploy AI-enabled products and services. Earnings visibility continues to improve in Europe.

Media and entertainment continue to report above-average sales and earnings growth, combined with undemanding valuations, although consumer demand may be affected by rising energy prices and other costs. Asia remains attractive, although relative valuations are less compelling. The telecom services segment has attractive defensive qualities, supported by improving fundamentals, low valuations, high dividend yields and low exposure to tariffs. 

Miners continue to benefit from a supportive macroeconomic backdrop, steady demand and sustainable price rises. Construction materials are seeing early signs of improvement. In contrast, margins in the chemicals industry are under pressure from higher energy and feedstock prices. Speciality materials/miners, including rare earth metals used in high technology products, are seeing robust demand.

The uncertainty regarding interest rate policy and the direction of potential changes is weighing on sentiment. Demand for high-quality office space and high-tech facilities, including data centres and specialist manufacturing, remains solid. Retail real estate remains challenged. The US market is particularly benefitting from reshoring trends and an improving residential market.

Sentiment is weak as margins are squeezed by rising costs (including energy, labour, and soft commodities). The pricing environment is challenging as inflation is changing consumer demand patterns. Valuations reflect the sector’s limited growth potential.

Regional conflicts are causing severe disruption to global energy supply chains with damage to energy infrastructure delaying any swift return to normality. Energy producers and refiners have been benefitting from elevated energy prices for several quarters. Valuations, free cash flow and dividend yields remain very attractive. Energy service companies may be less impacted by the immediate dynamics of the conflict.

The US government’s healthcare policies remain in flux, affecting the sector’s sales and profits. M&A activity has picked up as companies seek to offset pricing pressure on older medicines with new innovative products. Healthcare companies in Asia, particularly in China, are benefitting from new product launches, improving demand dynamics and relatively low valuations. New technologies in drug discovery, testing, patient records and diagnosis are set to transform the sector.

Utilities are managing a multi-year surge in demand for electricity as many segments of the economy transition away from fossil fuels, while IT-related demand for electricity continues to soar. With limited spare capacity, substantial capital investment is required to upgrade generation capacity and transmission infrastructure. Valuations and yields remain attractive.