AI Capex Surge and Sticky Inflation Drive Portfolio Realignment

​AI hyperscalers are boosting capex by 37% YoY, driving U.S. equity outperformance, while sticky inflation and rising term premiums tighten bond markets. Investors are shifting toward tech, short-duration debt, gold, and strategic commodities to navigate yield volatility, geopolitical fragmentation, and tariff headwinds.

Key Points

• Global equities rose in May led by a 6.2% S&P 500 gain driven by a 29.5% tech surge, 27.7% EPS growth from the Magnificent 7, and 37% YoY AI capex growth; markets remain shaped by yield curve steepening, tariff uncertainty, and sticky U.S. inflation limiting Fed cuts, while AI-led U.S. stocks, Financials, Japanese reforms, India’s EM momentum, and demand-driven energy and infrastructure plays lead sector performance.
  
  
• Rates and credit markets are normalizing with 10Y U.S. yields at 4.5%, eurozone bonds decoupling, EM and high yield debt returning ±10–15%, sticky U.S. inflation and deficits limiting Fed cuts and keeping rates at 4.38% in 2025, while rising term premiums and trade tensions pressure EM bonds, prompting a preference for short-term U.S. Treasurys, stronger European credit, and inflation-linked bonds as tariff hedges.
  
  
• FX markets show EUR/USD up 9.6% YTD to 1.14, USD/JPY down 7.9% to 144.85, and U.S. 10Y yields at 4.5%, with SGD currency dynamics shaped by stable U.S. breakevens (~2%), sticky inflation, and 37% YoY U.S. hyperscaler capex, while trade tensions weaken CNY, MYR, and TWD, geopolitical fragmentation raises FX volatility, and SGD investors find opportunities in EUR, JPY, USD, and INR, but face risks in EM FX like IDR and PHP.
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• Gold rose 26.1% YTD to $3,310.42/oz amid 10–15% volatility, supported by sticky inflation, disinflationary trends, tariff and geopolitical risks, EM currency weakness, and rising demand from India, Indonesia, and Brazil, with SGD investors gaining exposure through ETFs (GLD, IAU), diversified commodity baskets (+6.6% YTD), and selective rare earths, oil, and gas plays.

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AI Momentum, Macro Volatility, and Geopolitical Risk Drive U.S. Equity Leadership and Sector Rotation

U.S. Equities Reclaim Global Leadership on AI Momentum and Macro Resilience

Global equity performance in 2025 has been driven by a sharp rebound in the Information Technology sector. The sector fell -25.9% from February 19 to April 8 before surging +29.5% through end-May—contributing nearly half of the S&P 500’s 19% gain over the same period.
 
The S&P 500 posted a 6.2% return in May, its best since October 2023. This brought the index close to its February record high of 6,144 and marked its strongest May since 1990.
 
U.S. equities continue to show resilience amid macro volatility, supported by solid jobs data, renewed U.S.-China trade talks, and sustained investor confidence.
 
Nvidia’s earnings beat—despite tariff-related headwinds—exemplifies how AI remains a structural growth driver. It mitigates macro pressures and catalyzes technology sector outperformance.
 
AI hyperscalers are projected to grow capex by 37% YoY in 2025, compared to just 6% for the rest of the index. This underscores sustained reinvestment in innovation and reinforces long-term growth trends.
 
Sticky Inflation, Tariff Volatility, and Yield Curve Normalization Shape Sector Rotation

Equity markets face a complex backdrop of a modestly rising 10-year Treasury term premium, yield curve steepening, and easing global inflation pressures.
 
With 10-year breakevens anchored around 2%, these developments reflect normalization rather than systemic risk.
 
Persistent U.S. inflation limits the Fed’s room to cut rates, maintaining tighter financial conditions and pressuring rate-sensitive sectors such as real estate.
 
Trade-related uncertainty continues to weigh on export-heavy and multinational corporates, particularly in China and EM. This is due to the “on-again, off-again” nature of U.S. tariffs.
 
Policy volatility further amplifies market uncertainty. Regional divergence in monetary policy—such as recent ECB rate cuts versus rising U.S. yields—affects cross-border capital flows and equity pricing.
 
Meanwhile, structural geopolitical fragmentation increases long-term planning complexity for global multinationals.
 
Diversified Equity Strategies Anchor on AI, Energy, Japan, and EM Pockets of Growth

U.S. equities are supported by AI-driven earnings strength in semiconductors and cloud infrastructure. Leaders like Nvidia, Microsoft, and Alphabet are driving capex-led performance.
 
Financials maintain a slight overweight due to improved net interest margins as yield curves steepen.
 
Japan is favored due to structural reforms and reflationary momentum, making unhedged exposures attractive during global uncertainty.
 
India stands out in EM for its demographic tailwinds and digital transformation. Broader EM equities remain volatile amid trade frictions, requiring selective positioning.
 
Mid-cap cyclicals in Industrials and Consumer Discretionary are gaining traction amid broader earnings participation and normalized valuations. This is evident in weekly gains of 3.2% for the Russell 2000 and 1.7% for the S&P 400 Mid Cap.
 
Infrastructure and energy equities benefit from AI-driven energy demand and reshoring. Private infrastructure assets offer defensive growth.
 
Investors are advised to overweight U.S. equities, remain long on Japan, selectively position in India and EM commodity producers, and rotate into energy and infrastructure as dual beneficiaries of digital and physical capital spending cycles.
 

Rising Duration Risk, Fiscal Constraints, and Diverging Policies Shape Bond Market Strategy

U.S. Bond Markets Show Rising Sensitivity to Economic Shocks and Normalization Trends

The 10-year U.S. Treasury term premium has edged up, reflecting a normalization of interest rate dynamics.
 
This signals that investors now demand more compensation for duration risk following years of post-crisis distortions.
 
Recent data shows a marked rise in yield sensitivity to economic surprises, with regression coefficients nearing 1.5 compared to 0.5 in the pre-pandemic period.
 
U.S. 10-year yields ended the week at 4.5%, up 60 basis points since April.
 
This indicates increased duration risk and contributes to steeper yield curves after a prolonged inversion.
 
This shift is part of a broader global trend, with synchronized long-end yield rises in Japan and Europe.
 
Euro area bonds have begun decoupling from U.S. Treasuries amid regional rate cuts.
 
Notably, Italian BTPs have underperformed German Bunds YTD, highlighting sovereign credit divergence in the eurozone.
 
Meanwhile, inflation expectations remain anchored near 2%, with long-end U.S. rates stabilized between 4.0% and 5.0%, aligned with nominal GDP growth.
 
Foreign holdings of Treasurys reached a record $9 trillion in March 2025, underscoring their continued safe-haven appeal.
 
Sticky Inflation, Fiscal Expansion, and Tariff Risk Raise Global Term Premiums

Disinflation surprises are raising the likelihood of eventual Fed cuts.
 
The policy rate is projected to stay at 4.38% through 2025 before declining to 3.38% in 2026.
 
However, sticky inflation, U.S. fiscal deficits, and trade-related uncertainties constrain the magnitude of easing and have driven up term premiums.
 
With policy volatility rising and global deficits expanding, central banks have limited maneuvering space—adding to volatility in sovereign bonds.
 
In Europe, fiscal outlays for defense and infrastructure could worsen inflation-risk premiums.
 
Geopolitical fragmentation and the emergence of rival trade blocs exacerbate long-term uncertainty.
 
Emerging market bonds, particularly those denominated in local currencies, remain vulnerable to global trade frictions and capital flight.
 
Performance dispersion is widening across hard-currency EM debt and speculative-grade credits.
 
Liquidity, Yield, and Regional Divergence Shape Bond Allocation Preferences

Short-term U.S. Treasurys are preferred for their liquidity, low duration exposure, and resilience under varied macro conditions.
 
These provide a tactical hedge against uncertain Fed policy paths.
 
Intermediate sovereigns yielding between 4.0% and 5.0% offer balanced exposure in a stabilizing rate environment.
 
High-yield corporate bonds—offering a 7.43% yield and 3.01% YTD return—remain appealing for income.
 
However, selectivity is essential as spreads narrow and credit cycles mature.
 
European credit, both investment-grade and high-yield, continues to outperform U.S. peers.
 
This is supported by wider spreads and potential ECB backing.
 
Inflation-linked bonds are favored over nominal developed market bonds due to structural inflation risks tied to tariffs and fiscal expansion.
 
Investors are advised to avoid long-dated U.S. investment-grade credit where spreads are tight.
 
They should remain tactically neutral on UK gilts and international fixed income, given rising global yield correlations and FX policy divergence.
 
Emerging market hard-currency debt offers neutral positioning, with rate cut tailwinds now moderating.
 

Yield Differentials, Safe-Haven Flows, and Trade Tensions Guide Tactical FX Positioning

Currency Repricing Driven by Yield Gaps, Safe-Haven Flows, and Tech-Led Capital Shifts
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EUR/USD appreciated 9.6% YTD to 1.14, reflecting eurozone resilience and supporting EURSGD strength.
 
USD/JPY fell 7.9% to 144.85, driven by safe-haven demand and positioning JPYSGD for volatility and tactical upside.
 
USD/CNH remained range-bound at 7.19, with China maintaining currency stability.
 
Gold's 26.1% YTD rise highlights broader FX volatility and safe-haven demand.
 
U.S. 10-year yields rose to 4.5%, sustaining USD/SGD carry appeal, while softening inflation limits long-term USD upside.
 
EM currencies gained support from 11.2% YTD EM equity returns, but commodity-linked FX like AUD and CAD remain sensitive to ±15% swings in Brent crude and gold.
 
Geopolitical Tensions, Sticky Inflation, and Rate Divergence Amplify FX Risk Across Asia and Frontier Markets

SGD currency movements reflect anchored U.S. breakevens (~2%) and sticky inflation, which constrain Fed easing and reinforce the USD's yield premium.
 
U.S. capital inflows remain strong due to hyperscaler-led capex growth (+37% YoY), reinforcing dollar strength.
 
Record foreign holdings of U.S. Treasuries ($9 trillion) support USD demand.
 
However, U.S. tariffs and trade tensions weaken CNY, MYR, and TWD against SGD, while geopolitical fragmentation elevates FX volatility in frontier markets.
 
Diverging policy paths between the ECB and Fed create volatility in EUR/SGD and USD/SGD.
 
The MAS's managed float regime and appreciation bias help anchor SGD stability in contrast to volatile peers.
 
Long EUR/SGD, Safe-Haven JPY, and Selective Asia FX Offer Tactical Opportunities for SGD Investors

The euro’s 9.6% YTD gain supports a long EUR/SGD position, underpinned by ECB policy support and relative macro stability.
 
The yen’s 7.9% rise versus the dollar makes JPYSGD an effective safe-haven allocation during stress events.
 
The U.S. dollar remains attractive for SGD investors seeking carry and inflation protection, though long-term upside is capped by rate normalisation.
 
INR remains a structural growth play despite trade-linked volatility.
 
Selective Asia FX exposure—including IDR and MYR—may benefit from trade recovery, while CNH offers long-term diversification amid tight policy control.
 
Investors should maintain hedges on USD/SGD as macro softening and policy shifts may reduce yield advantages in 2026.
 

Gold and Strategic Commodities Outperform on Inflation Risk, Policy Volatility, and Resource Demand

Gold Shows Resilience Amid Market Volatility, Yield Swings, and Supply Pressures
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Gold has surged 26.1% YTD to $3,310.42/oz, outperforming all major commodities amid broad market volatility.
 
Its returns have fluctuated within a 10–15% range, driven by safe haven demand, inflation hedging, and policy uncertainty.
 
Sticky U.S. inflation, disinflation elsewhere, and heightened geopolitical fragmentation have triggered investor repositioning.
 
WTI crude is down 10% YTD despite a 6.2% weekly rebound, while Brent crude has shown ±20% volatility, adding risk to commodity-linked currencies and sectors.
 
The Bloomberg Commodity Index is up 6.6% YTD, while EM equities gained 11.2% YTD, signaling robust demand and capital flows into producers in India, Indonesia, and Brazil.
 
Sticky Inflation, Trade Policy Volatility, and Geopolitical Fragmentation Reinforce Gold’s Hedging Premium

Gold’s role as a non-yielding real asset continues to strengthen due to persistent U.S. inflation, dovish global central banks, and the rising complexity of global tariffs.
 
Limited Fed capacity to cut rates supports gold’s appeal in an elevated yield environment.
 
Policy interventions and fiscal deficits increase market volatility, reinforcing demand for safe havens like gold.
 
At the same time, emerging market producers face currency depreciation and tighter financing conditions, constraining supply from key exporters in Africa and Latin America.
 
These dynamics elevate the strategic utility of gold in SGD-based portfolios, where the MAS’s stability bias and managed float system provide a strong local anchor.
 
Gold, Rare Earths, and Commodity-Linked EM Producers Offer SGD-Based Strategic and Tactical Opportunities

Gold remains a core defensive allocation for SGD investors, offering low correlation, liquidity, and protection against inflation and geopolitical risk.
 
ETFs like SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) provide accessible exposure.
 
Broader commodity diversification via ETFs tracking the Bloomberg Commodity Index (+6.6% YTD) supports inflation resilience.
 
EM producers, particularly in Brazil, Chile, and Indonesia, offer leveraged upside via commodity and energy plays.
 
Tactical exposure to copper, lithium, and rare earths is increasingly attractive as AI infrastructure, electrification, and defense priorities boost global demand.
 
Funds such as Global X Lithium & Battery Tech (LIT), Global X Copper Miners (COPX), and VanEck Rare Earth/Strategic Metals ETF (REMX) offer thematically aligned access for SGD portfolios.