Three market triggers to watch this summer

Summer often heightens financial-market volatility and this vacation season offers no shortage of potential triggers.

Three factors are keeping investors on their toes: assumptions about artificial intelligence (AI) spending, the continuing Middle East conflict, and central banks’ response to the resulting inflationary pressures.

For multi asset investors, the challenge is not deciding whether these risks matter, but how much is already priced in.

Solid economic growth, exceptionally strong corporate earnings and supportive technical trends provide a favourable backdrop. Our view is constructive rather than complacent: stay invested, but combine selective risktaking with careful diversification.

We continue to view AI as a durable structural growth theme and do not see the recent market correction as evidence that the investment cycle is running out of steam. Instead, the recent decline in chipmaker and memory stocks reflected a combination of investors reassessing future cash flows and forced selling from leveraged positions, ranging from South Korean retail products to concentrated institutional portfolios. Borrowing to invest in exchange-traded funds remains high by historical standards, especially in South Korea, but has fallen from recent peaks. While this leaves a “cleaner” market set-up, sharp moves in individual stocks and concentrated holdings could still contribute to volatility.

This episode also showed that simply buying the most obvious beneficiaries may not capture the full opportunity. As the investment cycle broadens, investors will need to scan opportunities across the AI value chain – from semiconductors to applications.

Against this backdrop, we favour US and emerging market equities in multi asset portfolios. Earnings and revisions remain unusually strong, while technical trends – such as the prospect of stable or even improving earnings trends – are intact. South Korea and Taiwan remain important sources of AI-related earnings strength, while the reset in leveraged positioning supports a potentially steadier path.

Opportunities beyond the AI universe may also help balance portfolios. Financials stand out on both sides of the Atlantic, while European banks and basic resources offer cyclical exposure. This broadening matters because it allows investors to participate in a constructive equity backdrop without relying exclusively on the most crowded AI beneficiaries.

Middle East risk has repeatedly faded from investors’ view, only to return swiftly.

Oil remains the clearest transmission channel from Middle East tensions to markets. The partial closure of the Strait of Hormuz removed substantial supply from normal routes, yet prices rose less than feared because China reduced imports, inventories and alternative routes absorbed part of the disruption, and markets increasingly anticipated a negotiated solution.

Recent Iran talks appear to have reduced the immediate risk premium and oil has fallen back materially from its peak. The outlook nevertheless remains finely balanced as energy infrastructure and the Strait of Hormuz are still vulnerable flashpoints. Refined products face additional pressure from constrained Middle Eastern supply and Ukrainian attacks on Russian refineries.

Further escalation or renewed threats to shipping could raise crude oil, freight and refined-product prices, with import-dependent markets in Asia and Europe most vulnerable. Conversely, a lasting Hormuz reopening that restores normal flows would ease inflation and benefit these markets most.

High oil prices can fan inflationary pressures, putting the spotlight on how new US Federal Reserve (Fed) chair Kevin Warsh will respond.

Mr Warsh’s decision to keep interest rates on hold at the July meeting prompted government bond yields to rise to near two-decade highs, as investors sold their long-term holdings amid concerns that the central bank was falling behind in controlling inflation. The Fed’s lack of recent forward guidance leaves a wide range of possible rate paths and might be a source of additional volatility as investors place greater emphasis on interpreting macroeconomic and market signals independently.

The evolving policy debate within the Fed, fresh twists in the Middle East and continued uncertainty around a long-term solution, remain risks for bonds. Yet current yield levels and the repricing after the latest Fed meeting already reflect a meaningful portion of the inflation risk. Therefore, we retain a mildly positive stance on sovereign bonds, especially in Europe, while recognising that renewed oil or refined-product inflation could delay relief.

At the same time, the economy remains resilient, and corporate earnings are unusually strong, allowing us to maintain exposure to credit, particularly higherquality issuers.