Multiple Risks Intertwined　Asset Allocation Balances Offense and Defense

Recently, geopolitical tensions have escalated, disrupting energy supplies once again, which puts upward pressure on inflation and interest rate outlooks, adding uncertainty to risk assets. However, against the backdrop of supportive fiscal policies in several major economies, corporate earnings momentum and overall economic growth remain steady.

In the face of multiple uncertainties, investment strategies need to return to fundamentals: aligning with individual risk tolerance, diversifying risk through multi-asset allocation, and maintaining a long-term investment pace amid market volatility.

Negative factors piling up, market uncertainty rising

Initially, markets expected that with fiscal support, the economy and corporate profits would accelerate this year, boosting stock performance. However, recent negative news has introduced variables to this optimistic outlook.

The Middle East situation has driven energy prices higher, with no clear signs of easing in the short term; meanwhile, concerns over artificial intelligence (AI) are growing, including its potential impact on certain business models and the uncertainty of returns on large capital expenditures. Additionally, liquidity and risk exposure issues in the private credit market are gaining more attention.

While these factors do not yet constitute systemic risks, multiple adverse elements are fermenting simultaneously. Coupled with the upcoming U.S. midterm elections and leadership changes at the Federal Reserve, market volatility is expected to increase.

In this environment, investment strategies should balance offense and defense—hedging inflation risks while also seeking attractive entry points amid market fluctuations.

Capital shifting to “heavy assets,” industry cycles changing

Market style is also shifting. The “light asset” model dominated by tech stocks over the past years is gradually giving way to capital-intensive industries.

On one hand, investors are beginning to focus on AI’s potential to disrupt sectors like software development; on the other hand, AI development itself is driving massive infrastructure demand, boosting the need for energy, metals, and raw materials. Supported by expanding global fiscal spending, the fundamentals of “heavy asset” sectors such as natural resources, energy, utilities, and defense are clearly improving.

This indicates that market focus is shifting from digital applications to tangible support, and related sectors may regain prominence in a new cycle.

Allocation strategy: favor stocks, cautiously approach bonds

Given a resilient macro environment, solid corporate fundamentals, and the potential productivity gains from fiscal policies and AI, we maintain a relatively high allocation to equities. However, we remain flexible to adjust quickly in response to developments in the Middle East.

Regarding bonds, a cautious stance is advisable. Due to high uncertainty surrounding geopolitical events, predicting inflation trends will become more difficult, and these events could impact economic growth momentum, keeping interest rate volatility elevated. Currently, we favor shorter-duration strategies and are optimistic about high-yield bonds and emerging market bonds, especially those with improving fundamentals and benefiting from a weakening dollar, such as local currency bonds.

Diversification to manage multiple risks

Looking ahead, key variables influencing markets include geopolitical risks, inflation trends, changes in the U.S. labor market, and potential liquidity pressures in the private credit sector.

In an environment of multiple uncertainties, no single asset or theme can dominate. Through diversification, flexible adjustments, and moderate risk hedging, investors can navigate volatility steadily and seize opportunities arising from cycle transitions.