Inflation, CentralBanks and portfolio positioning
Despite the renewed escalation of the conflict in the Middle East, soft reflation remains our central scenario. We still expect economic growth to hold up, while inflation should remain elevated but under control.
Risks remain. Stagflation cannot be ruled out. The Strait of Hormuz is supposed to be open, but traffic through it has fallen to near zero. And disruptions in the Red Sea are still a concern.
Despite this environment, the global economy continues to show resilience, and the earnings season is currently very strong. Investment linked to artificial intelligence is helping to support activity and offset part of the pressure coming from higher energy prices and tariffs.
Central banks left interest rates unchanged in July. But additional hikes are likely before the end of the year. Policymakers remain cautious because of uncertainty around energy prices and the inflationary effects of strong AI-related investment.
In this environment of persistent geopolitical uncertainty, we remain invested in equities while keeping hedges in place.
We continue to favour technology hardware and semiconductor companies despite the recent correction. There are fears regarding the sustainability of AI-related investment and the sector’s concentration. But earnings remain strong and valuation attractive.
We stay overweight energy sector, which will bring diversification if Middle east tensions rise again.
In fixed income, we still prefer corporate bonds over government bonds.
Finally, gold and hedge funds continue to play an important diversification role.
