Is there light at the end of the tunnel for the U.S.-Iran conflict?

• The U.S. and Iran remain in negotiations for a ceasefire and the reopening of the Strait of Hormuz. We recognize that any agreement could be fragile, but what the global economy urgently needs is the resumption of supplies of oil, natural gas, and petrochemicals as raw materials for industrial production (GTMA P.70 & 72).
• The deal could have significant ramifications for Washington and Tehran with their domestic audiences. Yet the free flow of shipping helps reduce stagflation risk and provides a more constructive macroeconomic outlook for the global economy. This allows investors to select from a broader range of sectors that are more sensitive to the global economy, including consumer goods, transportation, and industrials that are sensitive to energy prices and supply (GTMA P.44 & 47).

What are the risks and opportunities in artificial intelligence?

• We have seen a rotation from AI model developers to hardware and semiconductor manufacturers in the past 12 months. This has also benefited selected APAC markets, such as Taiwan and South Korea. A shortage of production capacity for memory chips and high-end logic chips suggests that producers’ profit margins are likely to be resilient, but it also limits short-term earnings growth (GTMA P.52 & 53).
• Investors can look to sectors that could use AI, especially in research-intensive industries such as biosciences, advanced industrials, and chemicals. These sectors could strike a better balance between the cost of using AI and the importance of discovery in boosting earnings (GTMA P.51).
• As enterprises broaden their use of AI, token costs will be on CFOs’ minds. This may prompt investors to revisit assumptions about AI models’ revenue. The capabilities of advanced AI models could also prompt policymakers’ concerns about security risks. This could limit the potential markets for these models and their earnings-generation capability.

Are central banks turning hawkish again?

• Higher energy costs and steady growth momentum have already prompted many central banks to adopt a more hawkish position and tighten monetary policy. Australia began raising rates at the end of 2025, and the European Central Bank hiked for the first time in June, after not having done so since 2023 (GTMA P.17 & 18). The U.S. Federal Reserve kept its policy rate unchanged at Chair Warsh’s first FOMC meeting in June, but a significant share of FOMC members see the need to raise rates to pre-empt inflation risk before the end of 2026 (GTMA P.26).
• Even though this hawkish sentiment may persist through the summer, lower energy prices—subject to the Strait of Hormuz staying open—should give central bankers more flexibility. It is probably fair to assume limited room to ease monetary policy in 2H 2026 around the world, which could provide more support to value stocks and short-duration fixed income.

How should investors allocate their money?

• Despite hawkish central banks, questions over the next phase of AI development, and the fragile agreement between the U.S. and Iran, we still see plenty of opportunities for investors.
• In equities, lower energy prices should provide a broader opportunity set beyond technology, including sectors with a higher level of cyclical sensitivity. Some of the lagging markets in 1H 2026 could also potentially catch up as investors seek value. Europe and selected ASEAN markets can offer such opportunities (GTMA P.28 & 31). 
• In fixed income, reduced stagflation risk can help limit default risk once again and keep corporate credit spreads stable. Hence, the income component from corporate credit, especially non-investment grade, looks attractive. Short-duration government bonds still have appeal, since central banks may consider easing monetary policy in 2027 after the current bout of inflation scare is over. The long end of government bond curves could still be influenced by high fiscal deficits and domestic political uncertainties (GTMA P.55 & 56).