Investment Monthly: Bull market stays on course despite short-term markets dips

• The recent escalation of US-China trade tensions has increased market volatility. Although these heightened fears of trade policy risks and spurred profit-taking, we view this rhetoric as a negotiation tactic rather than a fundamental shift.
• While we expect the bull market to stay on course, short-term market consolidation should not come as a surprise. Our underweight on US Consumer Staples helps hedge against economic growth and inflation uncertainties, and we add Energy to the underweight list due to deteriorating prices and demand. We prefer investment grade and EM local currency government bonds, and downgrade high yield bonds – which are relatively riskier – to underweight due to tight spreads and rising volatility. We also reduce our preferred maturity for US investment grade to 5-7 years.
• Although gold has seen some volatility recently, it remains a good diversifier, supported by strong inflows into gold ETFs and central bank purchases. Given the USD weakness, managing FX risk remains critical for asset allocation. Multi-asset solutions can help achieve diversification across asset classes, sectors and currencies.

• The stock prices of many large-cap US tech companies have surged substantially, creating concerns about AI bubbles. We think the rally is supported by earnings growth rather than sharp multiple expansion. The sector’s fundamental strength is also underpinned by huge investments in AI and infrastructure, such as data centres and utilities, driven by the rapid growth of the cloud and end-user demand for AI.
• Despite valuations at 32x forward P/E (versus 79x in the early 2000s), we believe the Mag-7 and broader US tech stocks should continue to deliver double-digit earnings growth in 2025 and 2026. AI adoption should also benefit hardware and software companies. Therefore, we are not worried about an AI bubble and view any market pullback as a long-term buying opportunity.
• Given high US tech valuations, we are diversifying beyond IT and Communications into Financials and Industrials. The former benefits from deregulation and increased M&A activity, while the structural themes of nearshoring and US re-industrialisation make Industrials a compelling growth driver. We also upgrade Global and US Utilities to overweight due to rapidly increasing electricity demand (cloud and AI).

• China’s Fourth Plenum outlines a clear demand-side-driven growth shift in the 15th Five Year Plan (2026-30), with a focus on high-quality development, technology self-sufficiency, further economic reform, social development, people’s livelihoods, environmental-social-governance (ESG), and national security. We remain overweight on Chinese equities, keeping exposure to the tech sector and high-dividend quality stocks.
• In Hong Kong, the headwinds of weak retail sales and property markets and being less of a beneficiary of AI innovation have eased. More government funding for AI development, a stabilising  housing market, stronger retail sales growth, increased IPO and M&A activity, robust liquidity inflows and attractive valuations support upgrading Hong Kong stocks to overweight, aligning them with our existing overweight positions in mainland China and Singapore in Asia.
• Japan’s new Prime Minister, Sanae Takaichi, is expected to pursue expansionary fiscal policies, reminiscent of former PM Shinzo Abe’s ‘Abenomics’. However, funding is challenging amid increasing costs in social security, debt servicing and defence, as well as rising pressure for tax cuts. Therefore, despite corporate reforms with rising share buybacks and dividends, we remain neutral on Japanese stocks.

▲ Overweight

Global equities are supported by improving earnings momentum, easing inflation, AI investment, and central banks moving towards policy normalisation. We prefer quality stocks amid evolving policy and political landscapes.

▲ Overweight

Despite the recent market dip, earnings upgrades, resilient consumer spending, ongoing investment in AI and infrastructure and Fed rate cuts remain key drivers for US equities. We view any market pullback as a buying opportunity.

▶ Neutral

Despite a rebound in some activity signals and consumer confidence, real household incomes are weak and should remain so as wage growth is expected to decline. Uncertainty leading up to the Autumn Budget continues to weigh on sentiment.

▶ Neutral

European markets recently joined global peers higher, but despite fiscal spending plans next year, softer external demand and political uncertainty have led to uneven performance. We prefer Spain and Italy, while French deficit concerns remain.

▶ Neutral

Despite the continued reflation trend and structural reforms, rising expectations of expansionary fiscal measures under the leadership of the new Prime Minister, higher yields and tariff discussions with the US have tempered near-term sentiment.

▶ Neutral

Emerging markets stand out as key beneficiaries of Fed rate cuts, a weak dollar and FX diversification. EM Asia is preferred.

▶↑ Neutral

The region shows improving fundamentals and dividend strength while benefitting from the weaker dollar. Structural drivers in the UAE remain attractive, while South Africa is supported by expectations of lower policy rates and elevated gold prices.

▶ Neutral

USD weakness and rate cuts are supportive, but political uncertainties may limit upside. 

▲ Overweight

Asia remains a key source of diversification and opportunity in global portfolios, offering a compelling mix of reform-driven upside, resilient fundamentals, and long-term participation in the global technology and consumption cycles.

▲ Overweight

The strategic focus on high-quality development and demand-side expansion highlighted in the October plenum reaffirms our preference for IT and internet leaders, domestic consumption plays, and high-dividend SOE stocks. 

▶ Neutral

Slowing earnings momentum and weak foreign investment flows remain headwinds for Indian equities in the near term.

▲↑ Overweight

We upgrade Hong Kong equities due to an improving housing market outlook,  increased local IPO activity, strong liquidity inflows and attractive valuations. We continue to favour banks, insurance, telecom, utilities and quality developers.

▲ Overweight

Singapore continues to attract regional capital, backed by a robust financial system and a stable policy backdrop.

▶ Neutral

We think post-election optimism and expectations of an acceleration in the Corporate Value-Up Programme may already be priced in. The fiscal deficit and export risk also limit the upside potential.

▶ Neutral

The market remains heavily concentrated in its dominant semiconductor sector, and its hardware and non-tech segments are not fully benefitting from AI tailwinds. Valuations are near the top of the five-year range.

▶ Neutral

Despite fiscal concerns in some developed markets, government bonds still provide an attractive compensation above inflation, which helps build a key income stream for portfolios.

▶ Neutral

The US government shutdown and trade-related headlines support bonds, but many rate cuts are priced in. The term premium in longer-dated Treasuries remains historically elevated. We maintain a 5-7-year duration preference.

▶ Neutral

With elevated price pressures, we believe the BoE is likely to hold rates steady until next April. 

▶ Neutral

While fiscal deficit concerns and a weak external backdrop weigh on the core Eurozone economies, improved credit ratings and prospects of further yield convergence support our preference for periphery government bonds in the region.

▼ Underweight

We stay underweight on JGBs, especially in the long end, as markets may be concerned about higher issuance of government debt and fiscal sustainability risks.

▲↑ Overweight

Emerging markets benefit from supportive dynamics, including falling inflation, high real yields, a weaker USD and positive fiscal trajectories in several countries. EM local currency sovereigns also offer a relatively lower correlation to risk assets.

▶ Neutral

We still find yields attractive but remain selective and generally focus on quality bonds.

▲ Overweight

Despite tighter credit spreads, global investment grade bonds still offer an attractive income stream amid falling policy rates and diversification benefits.

▲ Overweight

US investment grade bonds offer an elevated carry and an opportunity to lock in yields from quality credit amid falling policy rates and the government shutdown. Following the recent rally, we tactically move our preferred duration to 5-7 years.

▲ Overweight

With a relatively stable macro outlook, EUR credit keeps attracting international capital flows. 

▲ Overweight

GBP investment grade bonds offer attractive carry and are less impacted by rate volatility compared to gilts.

▲↑ Overweight

The Asian credit market continues to benefit from global diversification flows and strong local demand for income. We favour Japanese and Australian IG bonds, Asian financials, as well as Chinese hard currency and Indian local currency bonds.

▼↓ Underweight

As stretched valuations and rising credit market volatility are headwinds for global high yield bonds, we move them to an underweight position to exercise caution.

▼↓ Underweight

Attractive overall yields and a low default rate persist, but stretched valuations and high yield’s sensitivity to negative credit headlines lead us to downgrade the asset class to underweight.

▼↓ Underweight

In line with our global view, we prefer to move up in quality and avoid spread-widening risks from cyclically-low levels.

▼↓ Underweight

Similar to EUR high yield, with spreads below long-term averages, we see more attractive risk-reward in the GBP IG space.

▼↓ Underweight

We downgrade Asian high yield to reflect our preference for quality credit amid trade-related and growth uncertainties.

▲ Overweight

Falling bond yields, USD weakness, strong ETF inflows and central bank purchases support the positive momentum. Gold remains a good diversifier against lingering global risks and uncertainties.

▶ Neutral

As geopolitical tensions in the Middle East seem to ease and supply remains excessive, oil prices will remain range-bound.

The momentum, spending and macroeconomic data continue to surprise positively. DM valuations are full, and the pricing environment is facing headwinds. European companies are struggling with the lingering effects of past price inflation, which is now limiting their growth potential as demand is soft (autos/luxury), and competition is rising in some segments (EVs/durable goods). In contrast, Asian companies remain attractive, trading at a discount to western peers, even as demand for local brands continues to rise and US sales remain supportive.

Global Financials reported stronger-than-expected results for Q3. Net interest income is likely to remain elevated as inflation remains stubbornly higher than expected, keeping interest rates elevated. Equity trading activity, bond issuance, IPOs and M&A remain strong. In Asia, we remain positive on China’s economy and the improving sentiment in the region.

The Industrials sector is benefitting from long-term developments including electrification, reshoring, supply-chain security, digital infrastructure, aerospace, and rising defence spending. However, uncertainty around tariffs remains a headwind to investment. Order books remain relatively healthy. 

The AI revolution underpins the resilience of the IT sector, as its deployment impacts other sectors globally. Strong demand for AI software, related hardware and services is driving robust growth across many segments. Second-quarter results uniformly exceeded expectations, with reassuringly confident management guidance alleviating concerns over high valuations. 

Communications stocks continue to deliver reassuring outperformance. In the US, attractive valuations are supported by above-average growth in sales and earnings driven by media and entertainment segments. Asia remains attractive, although relative valuations are less compelling. Europe’s telecom services sector offers a far less attractive proposition in terms of investment returns due to fierce competition, a lack of scale, market complexity and high capital spending requirements. 

The sector’s fundamentals and commodity prices appear to have troughed with macroeconomic indicators slowly improving in China and Europe. In addition, we expect oil prices to decline over the next 12-18 months, providing some benefits to the chemicals industry. Valuations remain undemanding, but tariffs remain a risk. 

The sector appears to have stabilised except in China, where some uncertainty remains. Retail space and older offices are particularly challenged as alternative consumer purchasing channels evolve and refurbishments costs remain high. New office developments and housing are experiencing better supply-demand dynamics. The re-routing of supply chains is driving demand for new facilities in developed and some emerging markets.

We downgrade the sector in Europe as prices that increased during the pandemic remain elevated. Consumers are trading down and are less willing to pay for branded staples, while costs continue to rise, especially wages. This puts pressure on revenues and margins in the near term. The US Consumer Staples sector is also facing a weak pricing environment, particularly mass-market branded goods and mainstream food retailers. Valuations may be undemanding, but there is limited potential for sales growth or margin expansion. 

We downgrade the sector on weak oil prices as supply outstrips demand, although US shale, as a high-cost swing producer, may adjust production if prices fall too much, limiting price declines. Gas is likely to remain in demand, especially as seasonal demand in the northern hemisphere may put upward pressure on gas prices. Low valuations, high dividends, and robust cash flows offer some support, but are not enough to offset the limited earnings and sales growth potential for integrated producers and energy services.

Asian Healthcare should benefit from improving demand dynamics, attractive valuations that are below their 5-year average, and rising investor interest in a new wave of innovative medicines. Tariffs, pricing, market access, and policy uncertainty related to the US are major concerns for all non-US healthcare companies and will continue to weigh on sentiment.

We upgrade Global and US Utilities due to the anticipated rise in electricity demand, positive price trends, and increased spending on energy infrastructure. Many economies are undergoing the electrification of transportation and the expansion of digital infrastructure, while rising affluence drives demand for air-conditioning, freezers, etc. Utilities are already operating at full capacity, so substantial capital investment is required to upgrade generation capacity and transmission infrastructure. Valuations are undemanding.