About investments, AI, and gold

The global economy is growing, corporate profit margins are at record levels, and expectations for earnings growth are very strong. Moreover, these earnings expectations have risen since the beginning of the year, while stock prices have been volatile. Consequently, equity valuations have declined slightly on balance. These factors provide support for equities.

On the other hand, the situation in the Middle East remains hard to assess, and disruptions in energy supply appear likely to last longer than we previously thought. Therefore, our equity allocation remains neutral.

At the regional level, we prefer equities in emerging markets (overweight) over those in developed markets. Emerging markets offer a combination of improving corporate earnings forecasts and more attractive valuations in key sectors such as IT. Emerging economies also benefit from the AI boom: the semiconductor sector in these countries is experiencing enormous foreign demand for semiconductor chips and components needed for AI applications. Furthermore, we expect the dollar to weaken somewhat. A weaker dollar is favourable for emerging markets.

Within developed markets, we are more positive about US equities than European ones. Europe is more heavily affected by higher energy prices than the US. In addition, the rise of AI provides a stronger boost to the US economy than to the European economy.

At the sector level, we are positive about industrials and information technology (both overweight). The industrial sector continues to benefit from increasing defence spending and European/German investments in infrastructure. The IT sector, particularly the semiconductor sub-segment, will benefit from the continued rise of AI. Semiconductor companies are showing positive revenue growth and profit development, supported by tight supply in the memory chip market and the expansion of areas where AI is being applied. Moreover, demand is growing for ‘advanced packaging,’ the process of combining multiple semiconductor chips into a single compact and efficient unit.

Looking at the broader picture, AI continues to attract strong investor interest. SpaceX, Elon Musk’s aerospace company that recently merged with his AI venture xAI, is preparing for an IPO this month. In addition, there is intense market speculation about potential listings of OpenAI and Anthropic. The buzz surrounding these IPOs has a positive effect on sentiment in the IT sector.

As a result of the Iran conflict, inflation expectations have increased. The energy price shock in particular seems to have a temporary upward effect on inflation. In turn, these higher expectations have led to higher yields on government bonds. This also means that the so-called ‘all-in yield’ on corporate bonds has risen. The all-in yield consists of the yield on government bonds combined with the risk premium on corporate bonds. Although we take a neutral view on bonds as an overall asset class, we acknowledge that higher yields have made bonds more appealing.

We see opportunities in high-quality bonds, particularly investment-grade corporate bonds. These bonds offer more attractive returns than savings accounts and government bonds. From a risk perspective, the outlook for investment-grade corporate bonds is also favourable: we expect default rates in this segment to remain very low in the coming period.

We are more cautious (underweight) on riskier bonds, including both high-yield bonds and emerging market debt (EMD). However, that does not mean we exclude these bonds entirely. While investment-grade corporate bonds are currently the ‘main course’ in our bond allocation, we also selectively take positions in high yield and EMD. These segments act as side dishes that add some spice to the portfolio, offering higher risk alongside higher expected returns.

We expect structural factors, such as geopolitical uncertainty and increasing gold reserves held by central banks, to support gold prices in the longer term. Investors can use this precious metal to diversify their portfolios. In addition, the dollar may weaken further, partly due to the rising US national debt – a reason for investors to view gold as an alternative to the dollar.

Our view on gold is therefore positive (overweight). In the first weeks after the outbreak of the Iran war, gold prices came under significant pressure. In March, we used that correction as an opportunity to increase our gold position. Would you like to learn more about our expectations for gold? Then read our gold outlook.