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- [00:02]
A
Hello everyone and welcome to this edition of Julius Baer's Moving Markets the View Beyond, a series of podcasts in which we delve a little deeper into the topics on investors minds. My name is Bernadette Anderko and I'm delighted to be joined today by our head of research, Christian Gattaca and our head of research in Asia, Mark Matthews to talk about Julius Baer's mid year market outlook. Hello to you both and welcome to the podcast.
- [00:30]
B
Hello Bernadette.
- [00:31]
C
Hello Bernadette.
- [00:33]
A
So to the agenda. Today we're going to talk about the current market environment, our expectations for the rest of the year, and of course we'll discuss where you and your teams see opportunities for investors looking particularly at equities and the fixed income space. And dear listeners, before we get into the conversation, I'd like to ask you please to take the time to listen to the important legal information at the end of the podcast. So, recent geopolitical tensions in the Middle east have certainly rattled markets. What's our take on the war in Iran and the very fragile nature of the truce we've witnessed lately?
- [01:06]
B
Yes, Bernadette, our core view is that events like these rarely create entirely new market regimes, but they do accelerate what is already underway. What we have been highlighting in our outlook is a structural shift from a savings glut to a savings grab. For years, excess global savings kept capital abundant and cheap. Today, we are moving into a world where capital is increasingly in demand. Geopolitical tensions reinforce this shift. Defense spending is rising, energy systems are being reconfigured, supply chains are being regionalized, and at the same time, the AI buildout is absorbing enormous amounts of capital. So rather than changing the direction of travel, recent events are intensifying the competition for funding and accelerating capital reallocation. That said, we do not see this translating into a renewed structural rate hiking cycle. Oil infrastructure has remained largely intact. We expect energy prices to ease in the second half of this year. And crucially, we are not seeing the kind of wage pressure that drove inflation in previous cycles.
- [02:16]
A
Okay, so then it's not necessarily a reason to abandon ship, but rather to reassess portfolio allocations.
- [02:23]
B
Exactly, Bernadette. This is not an environment in which we step aside. It is one in which to be selective. We remain constructive because the underlying regime is still expansionary. Periods of volatility should be seen as opportunities to add exposure, particularly to areas benefiting from the ongoing Capex cycle. So setbacks like the recent market wobble should be seen as selective entry points. Our emphasis remains on identifying and investing in areas benefiting from this capital expenditure boom. Capex across diverse geographies and sectors. We're looking for companies poised to capitalize on these structural shifts.
- [03:04]
A
So despite this immediate knee jerk reaction to the Middle east escalation and the expectation of more aggressive central bank tightening as opposed to cutting the the actual movement in bond yields has been surprisingly contained so far, hasn't it?
- [03:19]
C
It certainly hasn't been anything like the big rise in yields that happened in 2022. Bernadette the 10 year treasury yield is about 50 basis points higher than it was before the Iran war started 15 weeks ago. But if you think back to 2022, 15 weeks after Russia invaded Ukraine, the 10 year treasury yield was 140 basis points higher. Admittedly, that's when the Fed was raising interest rates aggressively too. But now the 10 year yield is at 4.5%. We think that's a very decent buffer against further rate rises. I should add. We don't expect any, but the market seems to, as you said. And so we think the downside on bonds is limited. In fact, there's upside for corporate bonds because the economy is doing quite well. And I might add, given I told you we don't expect rates to rise, you might think that's strange given the war in the Middle East. But inflation expectations are very tame in the United States. And so implementation wise, our fixed income analysts say that when the 10 year treasury yield gets to about 4.5%, which is where it is today, that's a good time to extend duration in bond portfolios. And then when yields fall back to about 3.5%, we recommend scaling back into shorter duration. Again, Bernadette Outside of the US in bonds, I might add that despite all the bad news you might read about the United Kingdom, the fact is their fiscal position is much stronger than most developed countries. The International Monetary Fund forecasts no change in the UK's debt to GDP ratio over the next five years, but for the US for example, expects that ratio to widen about 20%. And we also like Australian bonds, the Australian currency. We like it too. They're one of the rare developed countries that actually runs a fiscal surplus. Norwegian krone has a good yield. The Chinese renminbi, well, the government bonds don't have a very good yield, but we think their currency is definitely undervalued and will appreciate in the next few years.
- [05:34]
A
Okay then, but what about riskier segments of the fixed income universe, like high yield for instance?
- [05:39]
C
Well, high yield has demonstrated a remarkable resilience this year, considering all the news. Because of that resilience, the spreads are actually quite tight and we don't see a lot more capital appreciation in the high yield space. But the yields in aggregate in high yield are still good. On balance, we would recommend moving up the credit quality spectrum. We do think eventually companies with weaker balance sheets will feel the pinch of higher borrowing costs. So we do generally favor investment grade corporate bonds in developed markets. In the emerging markets, we like debt denominated in hard currency. And for investors with higher risk tolerance, emerging market local currency debt has even higher yields. And you might be surprised, but most emerging markets today actually run quite credible monetary policy. In fact, for many of them, their monetary policy is more credible than developed markets.
- [06:49]
A
Turning to equities, the narrative shifted noticeably in the first half of the year. Christian, with non US markets initially leading before reversing course. What are your expectations now?
- [07:01]
B
Yes, Bernadette, we don't anticipate a sustained revival of non US equity outperformance unless global energy markets stabilize or rather oil prices soften markedly. The recent surge in oil prices disproportionately impacted energy importing regions like Europe and parts of Asia, triggering a flight back to US equities, particularly those connected to the AI infrastructure buildout. Semiconductor manufacturers and equipment providers, for example. These companies benefited from strong earnings and continued capital commitments from the tech giants. Looking ahead, we believe the strongest earnings momentum will remain concentrated in AI related sectors. This underpins our upgrade of the communications sector to overweight, where we see the combination of AI monetization and resilient cash flows. At the same time, valuations outside the US are becoming more attractive, especially in cyclical sectors tied to investment spending, which fits well with the broader savings grab theme.
- [08:08]
A
Okay, so you've mentioned some of the sectors that we particularly favour there, Christian. I know we've also had an overweight on both financials and healthcare for a while now, and I believe that's maintained. But we have made some changes when it comes to our preferences in Europe, haven't we? Perhaps you could talk us through those and the reasons why.
- [08:24]
B
Yes, Bernadette, our positioning in Europe reflects both structural and cyclical considerations. We remain cautious on consumer facing sectors where earnings momentum is still subdued. At the country level, we favor the periphery over the core. Spain and Italy benefit from stronger banking dynamics and exposure to electrification related investment. By contrast, core market such as Germany and France remain more exposed to cyclical manufacturing or consumer headwinds, while Switzerland continues to be supported by its defensive sector mix.
- [09:00]
A
And of course we remain overweight on global emerging markets, supported by a softer US dollar outlook and earnings tracking. That's ahead of expectations with an outsized contribution of AI linked Asian markets. So, Mark, perhaps you could elaborate on the specific opportunities you're seeing there.
- [09:17]
C
Well, you're absolutely right, Bernadette. AI is the primary driver of equity returns in Asia so far this year. And of course that means North Asia and we're overweight. Japan, South Korea and China. I'd say beyond AI, on top of that, in Japan there are economic reforms and improving corporate governance. South Korea benefits more than anybody else from this tremendous shortage in memory chips globally and that's expected to last until 2027. China's underperformed this, but it does have big AI potential, especially in the mainland, a share market, I should mention India, it is an underperformer. But the consumption story and the financial inclusion story in India, that basically means more and more people investing in its stock market. They're very much intact.
- [10:14]
A
Okay, if we turn to one of our preferred next generation themes now, cloud computing and AI, we still believe there's genuine investment potential, right?
- [10:24]
C
Yes, we do. And there's no rocket science here. It's just the relentless capital expenditure by those big American hyperscalers, Amazon, Microsoft, Google and the like. Because demand for data centers exceeds supply and critically, we're already starting to see that these data centers are making money.
- [10:48]
A
And another one of our next generation themes still very much in your analyst's favour is clean energy. So the recent energy shock must have provided a boost to this sector, right?
- [10:58]
B
Absolutely, Bernadette. Energy shocks tend to accelerate structural change. The recent spike in oil prices reinforces the strategic case for energy diversification which supports renewables storage and grid investment. Importantly, clean energy is no longer just a policy driven story. It is increasingly cost competitive, particularly in emerging markets where energy security is a priority.
- [11:25]
A
All right, let's touch on commodities now. Whilst some investors are questioning whether or not we're now in a super cycle, I believe we prefer to call the scenario a super shock. And that's not just a matter of semantics, is it? Perhaps you'd explain the difference, Mark?
- [11:40]
C
He asked Bernadette. Well, a super cycle, as the name implies, is a long lasting, broad based surge in commodity prices driven by overwhelming demand. And that's what we saw in China around 20 years ago. We're not seeing that same kind of explosive demand for commodities now. What we're seeing, as you rightly pointed out, is a shock. But to be clear, we firmly believe it's a temporary shock driven by geopolitical events. So even if the headlines look bad, and they do, I think the market must know something beyond the headlines because the oil price peaked way back in early April and it's now in the 80s. And I think what the market knows is simply that there's a lot of oil in the world, not only in the Persian Gulf. And to Christian's point, thanks to this war, there is an even bigger move into alternative energy. So we expect the oil price to go back to pre war levels in the next six months. As Christian said earlier, it depends, I guess, in terms of the actual price on how the war pans out. But that's the direction we see.
- [12:53]
A
Okay, and we have to talk about gold, don't we? It's not proved to be the ultimate safe haven in this recent crisis. Why is that and what do we expect going forwards?
- [13:04]
C
Well, gold is still the ultimate safe haven, but it doesn't mean that the price will always go up, especially when it was already a crowded trade, as you may recall at the end of last year. And on top of that, this year the dollar has strengthened because rate cut expectations have fallen and a lot of money is moving into the US to prepare for these big technology IPOs. But what I'd say is if you can take a longer term view on gold, which you absolutely should, the fundamental backdrop is still good. And that is basically that central banks will keep buying gold. Not only them, but other institutions and even individuals. Generally, individuals and institutions don't want to have portfolios that are so heavily weighted in dollars anymore. So we still are constructive on gold.
- [14:05]
A
Okay. Finally then, let's briefly discuss currencies. The US Dollar experienced a rebound amidst the recent unrest. But is this a sustainable trend? Christian?
- [14:15]
B
No, Bernadette. We think the dollar has recently benefited from risk aversion, delayed rate cut expectation and its correlation with oil prices. However, our long term view remains bearish on the dollar, citing the twin deficits as well as potential easier monetary policies than with other currencies. The Japanese yen continues to struggle due to its rate disadvantage and sensitivity to energy prices. Increasing pressure on the bank of Japan to normalize policy, which means raising rates and large forex interventions have limited the depreciation so far. And a more hawkish bank of Japan could foster a limited Japanese yen recovery. Elsewhere, we favor commodity currencies like the Australian dollar and Norwegian krona, supported by hawkish monetary policies and improved terms of trade.
- [15:08]
A
Okay, well, I think we're more or less running out of time now, but are there any messages you'd like to leave our listeners with as we head into the second part of 2026.
- [15:17]
B
Yes, Bernadette, if I had to summarize the key message. We are entering a world where capital is no longer abundant. It is contested. That shift has profound implications for markets. It favors real investment, pricing power and capital discipline. For investors, the focus should be on where capital is flowing and which companies are positioned to benefit from that shift.
- [15:39]
A
Okay, Very clear message there. Wonderful. Thank you both for the very insightful conversation today. Great to have you both on the podcast. Thank you.
- [15:45]
B
Thanks for having us, Bernadette.
- [15:47]
C
Yes, thank you, Bernadette.
- [15:49]
A
And with that, we conclude this edition of Moving Markets, the View Beyond. Thanks again to Christian and Mark for joining me today and thank you all for listening. We hope you enjoyed the podcast and that you'll join us again soon. Bye for now.
- [16:08]
D
The information and opinions expressed in this podcast constitute marketing material and are not the result of independent financial or investment research. Please refer to www.juliusbear.com legal podcasts for further other important legal.