AI Demand and Tariff Shocks Reshape Global Investment Flows

Global markets are being transformed by surging AI-driven infrastructure demand and disruptive tariff regimes, prompting strategic rotation into service-led tech, industrial metals, and resilient currencies. Investors are recalibrating equity, bond, and FX exposures to hedge volatility and capture opportunities across policy-backed sectors and non-USD markets. ​

Key Points

• Strong projected EPS growth, fiscal support, and easing yields are driving a shift into service-led tech sectors like SaaS and AI, though equity volatility is rising due to rate fluctuations, tariff pressures, and EM constraints, while capital rotates into policy-backed sectors such as clean energy and defence, with SGD portfolios advised to hedge USD exposure and diversify into FX-stable markets.
  
  
• Rising US yields and valuation risk are driving flows into EM and Asian IG bonds, with investors favouring 5–7 year durations and reducing BBB exposure, while persistent inflation, fiscal deficits, and FX risk are steepening curves and reinforcing a shift toward short-duration, floating-rate bonds and diversified strategies in reserve currencies.
  
  
• The US dollar declined 10.7 percent in H1 2025 amid rising deficits and narrowing yield spreads, while investors rotated into safe-haven and commodity-linked currencies as tariffs, policy divergence, and geopolitical risks increased FX volatility and drove diversification into EM, EUR, RMB, CHF, JPY, and SGD-backed strategies.
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• OPEC+ output growth, US shale constraints, and 50 percent copper tariffs are reshaping commodity markets, with fiscal reforms and clean energy transitions redirecting capital, while inflation, geopolitical risks, and supply limits in EMs drive volatility, gold demand, and investor rotation into industrials, rare earths, and LNG, alongside SGD portfolio diversification and hedging against USD exposure.

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AI and Fiscal Policy Reshape Global Tech Equity Allocation

Capital Rotation into Service-Led Tech Models

Tech equities are supported by strong earnings growth, especially in the US where EPS is forecasted to rise 10.8 percent in 2025 and 12.7 percent in 2026, with continued investor interest in SaaS and AI infrastructure. Capital is rotating into innovation-driven sectors like space and AI, while moderating yields and expected US rate cuts support valuations in long-duration tech names.

Fiscal and tax policy is boosting tech equity performance, with the US offering a 35 percent tax credit for semiconductor investments and Germany investing in digital infrastructure. However, subsidy cuts in renewables and tariff uncertainty in critical minerals are dampening investor confidence in some segments.

Capital is moving from export-reliant hardware to service-led models like SaaS, AI platforms, and satellite internet to protect margins and improve earnings visibility. TSMC’s focus on US-based high-margin operations and the outperformance of service-oriented tech underscore this strategic shift.

Tech Volatility Amid Macro and Geopolitical Pressures

Tech equities face elevated volatility from rate uncertainty, tariff-driven input costs, and geopolitical risks, particularly affecting hardware producers. Earnings dispersion and sector-specific challenges in Europe, China, and media or healthtech segments contribute to unstable equity returns.

Equity growth in emerging markets is constrained by funding gaps, currency mismatches, and infrastructure deficits, especially in Sub-Saharan Africa and parts of Asia. Despite some reform momentum, high local debt and limited capital access continue to weigh on scalability and investor confidence.

Policy-Backed Sectors Drive Thematic Leadership

Capital is flowing into tech, defence, and clean energy equities aligned with fiscal priorities, while firms with recurring revenue and efficient monetisation models like SaaS and AI are attracting more investment. Strong thematic gains in sectors like space tech and reduced credit risk in former high-yield issuers are enhancing shareholder value.

High-conviction equity themes include AI, SaaS, space tech, digital infrastructure, and defence innovation, with additional opportunities in fintech, green tech, and select consumer tech firms. Strong policy support in India, the Middle East, and Europe is reinforcing long-term investment cases.

SGD investors should hedge USD exposure using options or forwards and diversify into EUR, RMB, CHF, and JPY to reduce currency risk. Allocating to stable-FX regions and adopting barbell strategies across credit and equity can enhance capital structure resilience and portfolio stability.

Rate Cuts and FX Repositioning Reshape Global Bond Strategies

Rotation Into High-Yield and Frontier Sovereigns

US Treasury yields have risen sharply, with the 30-year reaching over 5 percent, flattening the yield curve and tightening investment-grade spreads to 15-year lows. EM and Asia IG bonds offer attractive yields of 6.3 percent and 4.9 percent respectively, with EM debt returning 12.3 percent in local rates during H1 amid easing and disinflation.

Expected US rate cuts and Europe’s fiscal expansion are steepening yield curves and raising long-end bond issuance. The ECB’s asset purchase wind-down and Japan’s short-dated issuance are reshaping demand-supply dynamics, while barbell strategies and A/BBB credit are favoured to manage duration risk.

Investors are moving into high-yield and BBB-rated bonds due to compressed IG spreads and rising sovereign duration risk. Senior bank debt and top-rated CMBS are preferred for credit protection, while Nigerian and frontier sovereigns are gaining interest due to reforms and narrowing spreads.

Macro Risks Elevate Long-Duration Bond Volatility

Tariff-driven inflation, fiscal deficits, and geopolitical instability are heightening volatility in long-dated bonds. The US fiscal deficit and Middle East tensions are steepening curves and driving flight-to-quality flows, while core inflation and policy uncertainty are delaying easing.

EM bond stability is limited by foreign capital dependence, weak fiscal space, and currency depreciation risk. China’s falling yields and India’s tight policy highlight monetary constraints, while high EM USD yields reflect persistent risk premia amid incomplete structural reforms.

Short Duration and FX Hedging Gain Traction

Investors are adjusting duration in response to rate uncertainty, favouring short-duration, floating-rate, and inflation-linked bonds. Allocations are tilting toward AAA-rated RMBS, short-dated high-yield, and barbell strategies to manage yield volatility and optimise carry.

India, frontier EMs, and the UAE offer value due to monetary easing and structural support, while Eurozone and UK sovereigns benefit from fiscal expansion and curve steepening. Asia IG and HY, along with US IG and AAA RMBS, continue to offer yield and credit stability.

SGD-based investors are advised to hedge USD exposures using swaps, options, or forwards and to diversify into reserve currencies like RMB, EUR, and CHF. Allocating to stable FX regions and using systematic strategies enhances risk-adjusted returns and protects against yield curve volatility.

​Global FX Repricing Accelerates on Fiscal Divergence and USD Decline

Dollar Weakness and EM Gains Amid Fiscal Divergence

The US dollar weakened by 10.7 percent in H1 2025 due to rising fiscal deficits and diminished reserve appeal, while the euro gained 9 percent and is projected to reach 1.20 by Q4 2026. EM currencies benefited from dollar softness and monetary easing, though Sub-Saharan African currencies remain vulnerable to capital outflows and structural imbalances.

Tariff-driven inflation is limiting Fed easing and temporarily supporting the dollar, but expected rate cuts and fiscal expansion in Europe are lifting the euro. UK rate cut expectations weaken the pound, and escalating global trade tensions are adding volatility and driving investor rotation into non-USD currencies.

Safe-haven currencies like USD, CHF, and JPY outperform in risk-off periods, while commodity-linked and reform-driven EM currencies benefit in risk-on settings. EUR and CNY are supported by strong fundamentals, though EUR faces headwinds from export competitiveness, and US NFP surprises drive EM FX moves.

FX Volatility Driven by Inflation and Structural Imbalances

Narrowing rate differentials and moderating US inflation are undermining the dollar’s carry advantage, while BoJ tightening boosts the yen. Middle East tensions and trade conflict amplify volatility across EM and DM FX, and rising US deficits drive reserve diversification and central bank gold buying.

China’s cautious FX policy reflects concern over capital flight, while Sub-Saharan African currencies depend on stable inflows and inflation control. Weakening Chinese exports, sticky Indian inflation, and extended EM bond maturities underscore vulnerabilities and justify elevated FX risk premiums.

Currency Positioning Supports Diversification and Hedging Strategies

Weaker USD and EM easing support longs in INR, IDR, and PHP, while long EUR positions benefit from fiscal optimism. AUD and CAD are favoured on commodity strength, JPY for policy tightening and risk hedging, and SGD, KRW, RMB, CHF, and EUR remain core reserve exposures.

EURUSD is expected to climb to 1.20 and USDJPY to fall to 130.00 by end-2026, while GBP remains pressured by rate cuts. EM currencies like the naira and kwacha gain under stable yields, whereas INR and CNY face short-term trade risks despite longer-term resilience.

Interest rate swaps, options, and partial USD hedging are advised for SGD portfolios to manage volatility and capture EM upside. Allocations should shift from weaker ASEAN currencies to resilient ones like INR and AED, with broader diversification into RMB, EUR, CHF, and JPY for stability and return optimisation.

Tariff Shocks and AI Demand Reshape Global Commodity Strategies

Oil Supply Shifts and Middle East Diversification

OPEC+ production increases may weigh on oil prices in H2 2025, but constrained US shale investment supports Middle Eastern pricing power and economic growth. Capital is rotating into non-oil sectors in the UAE, while demand for LNG, copper, and industrial metals remains strong amid infrastructure-led growth and clean energy shifts.

Elevated US tariffs and targeted subsidies are reshaping global commodity flows and domestic investment, while fiscal reforms in regions like the Middle East are reducing oil dependence. Germany’s €115 billion infrastructure budget and evolving trade deals with 10–30 percent tariffs are fuelling structural capital shifts into commodity-intensive sectors.

Industrial commodities like copper and rare earths show pro-cyclical behaviour tied to infrastructure and tech demand, while precious metals such as gold rise on fiscal stress and geopolitical instability. Gold’s counter-cyclical appeal is reinforced by strong ETF inflows and currency risk hedging in EMs.

Tariffs, Geopolitics, and EM Supply Constraints

Commodity markets in 2025 are volatile due to tariff-driven inflation, geopolitical risks, and rate uncertainty, with US copper premiums spiking post-tariff and oil subdued by policy ambiguity. Gold demand is rising amid macro stress, while front-loaded trade inflates H1 prices before tapering in H2.

Financial instability, limited public investment, and FX policy constraints are weakening commodity production and export capacity in EMs. China's debt burden and slowing exports, India’s tight monetary space, and historical underinvestment in frontier markets all hinder infrastructure and resource scalability.

Strategic Rotation into Industrials and Safe Havens

Commodity allocation is shifting through pre-tariff inventory plays, structural moves toward industrials, and barbell strategies balancing cyclicals with gold. Tactical exposure favours deregulated fossil energy over under-supported renewables, with currency options and sector rotations enhancing precision.

Rare earths, LNG, copper, and defense-linked metals are expected to outperform due to geopolitical tailwinds and demand from electrification and AI. Gold remains a preferred hedge, while commodity-exporting countries like Australia and Canada gain from capital inflows and currency strength.

SGD-sensitive investors are deploying currency options, interest rate hedges, and short-duration instruments to manage FX and duration risk in commodity exposure. Diversification into RMB, EUR, and JPY and long-short EM strategies support resilience amid USD volatility and macro shifts.