AI, Gold, and EM Assets Lead Capital Reallocation Trends

Capital is rotating rapidly toward AI infrastructure, gold, and EM assets as investors respond to fiscal instability, dollar weakness, and shifting policy incentives. With tech earnings outperforming, bond markets adjusting to inflation risk, and commodity flows favoring fossil fuels and AI metals, portfolio strategies are being redefined for a volatile macroeconomic future. ​

Key Insights

• Strong tech earnings and fiscal incentives support selective optimism, while tariffs, high rates, and policy shifts compress margins and drive capital rotation into AI, fintech, and hedging strategies.
  
  
• Investors favor short-duration and barbell bond strategies as inflation, US deficits, and FX volatility raise bond risks, while emerging market gains persist and currency hedges enhance portfolio resilience.
  
  
• Rising US deficits and commodity-driven inflation are pressuring the dollar, prompting short USD trades and reallocations into EM assets, gold, and reserve currencies like the EUR and RMB.
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• Commodity markets remain volatile as policy-driven flows and geopolitical shifts drive capital into fossil fuels, gold, and AI-linked metals, while EM exports face strain from infrastructure gaps and financing challenges.

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​AI Investment and Capital Rotation Reshape Global Equity Market Outlook

Strong Earnings and AI Capex Lift Tech Valuations

Strong Q1 earnings, AI capex, and tariff de-escalation boosted tech equity valuations, while a weaker USD and falling Treasury yields enhanced capital flows into growth sectors, particularly in EMs and globally exposed firms. Capital rotation is favoring traditional energy and defense, with clean energy equities under pressure due to tax credit phaseouts.

Digital regulation, fiscal stimulus, and targeted incentives such as tax credits and grants are shaping tech equity valuations, with benefits flowing to fintech, defense, and traditional energy, while renewables face downside risk from policy rollbacks. Eased capital rules and infrastructure funding are also supporting digital and capital-intensive tech segments.

Investor focus is shifting from hardware to service-based tech models due to scalable revenue streams, policy flexibility, and FX-driven margin advantages. Capital is also rotating into energy, defense, and healthcare tech tied to digital infrastructure and automation, reflecting a preference for short-cycle, cash flow-visible segments.

Tariffs and Yields Drive Tech Volatility

Volatility in tech equities has risen from US tariffs, rising yields, and geopolitical shocks, with regulatory risk and input cost spikes compressing margins. Long-duration equities face valuation pressure from higher discount rates, while FX swings and labor market weakness amplify earnings risk for global and consumer-facing tech.

Despite recent inflows, EM equity growth is constrained by currency mismatches, funding gaps, and shallow financial infrastructure, with risk of reversal if the USD strengthens. Uncertainty in US clean energy policy and shifting global reserve preferences may further limit capital access and sector scalability.

Capital Shifts to AI and FX Hedges

Capital is flowing into AI, fintech, and cyclical sectors with clear monetization paths and recurring revenues, while tax incentives and government subsidies support energy and defense-linked equities. With some valuations fully priced, investors are rotating toward undervalued or policy-supported segments offering better upside potential.

SGD-based investors should hedge USD exposures, diversify geographically into non-USD assets, and consider allocations in currencies like RMB or CHF to mitigate FX volatility. A lower US yield outlook supports equity over debt, favoring equity issuance and selective leverage in resilient, high-cash-flow tech names.

SGD-denominated investors should hedge USD exposure using options and diversify into non-USD assets, particularly in markets with easing monetary policy and strengthening reserve currencies like RMB, JPY, CHF, and EUR. A weaker US yield outlook supports equity-led growth and selective leverage in high-cash-flow tech equities, with active FX overlays critical amid elevated volatility.

​Yield Curve Steepening Reshapes Global Bond Allocation Strategies

Barbell Strategies Amid Yield Curve Steepening

Despite rising long-term yields from QT and fiscal deficits, global bond markets remained stable, with corporate credit spreads tightening and EM local bonds returning 12.3 percent on strong capital flows and lower rates. Investors are adopting barbell strategies, favoring 2–3 year high-quality credit and selectively entering 7–10 year bonds when yields exceed 4.5 percent.

Bond valuations and duration risk are being shaped by Fed easing, ECB and BoJ liquidity tightening, and a USD 4.5 trillion tax cut package, which are collectively steepening yield curves and raising term premiums. Regulatory measures like relaxing capital requirements and preserving foreign demand are helping mitigate volatility and support demand.

Investors are favoring high-quality, short-duration credit such as A/BBB-rated 2–3 year bonds due to rate and credit volatility, while 25-year-plus Treasuries show steep losses in rate hikes. Currency-hedged allocation and EM credit rotation are being used to optimize value amid global divergence and weakening US growth.

Volatility from Inflation, Fiscal, and EM Risk

Bond volatility is driven by inflation expectations, geopolitical instability, and fiscal deterioration, with US tariffs and deficits steepening curves and raising risk in long-duration Treasuries. A 1 percent rate hike results in an 11.7 percent drop in 25-year-plus USTs, compared to 2.4 percent in IG corporates, underscoring duration sensitivity.

EM bond stability is threatened by dollar strength reversals, policy divergence, and FX volatility, with recent gains driven by disinflation and capital flows. Weak macro frameworks, reserve currency shifts, and commodity-linked shocks further heighten outflow risk and yield volatility in currency-sensitive EMs.

Hedging and Diversification Support Bond Resilience

Investors are rotating into short-duration, investment-grade credit and deploying barbell strategies to manage volatility, while shifting toward inflation-linked and local-currency EM bonds. Tactical exposure to high-quality HY and cross-border rate divergence is being managed through active security selection and targeted FX hedging.

Bond valuations remain attractive in regions with easing paths, such as UK gilts, Eurozone front-end, and EM debt with stable real rates. US investment-grade corporates and financial-sector bonds also benefit from supportive policy, while duration-linked bonds and gold gain appeal as fiscal hedges.

SGD-based investors are advised to use currency options, interest rate swaps, and cross-currency hedges to manage USD exposure and duration risk. Diversifying into EM debt, inflation-protected assets, and reserve-currency bonds enhances portfolio resilience amid volatility, regulatory shifts, and policy divergence.

​Rising US Deficits Drive Global Shift from Dollar Assets

Global Reallocation Drives USD Decline and EM Outperformance

The US dollar posted its steepest first-half drop since 1973 as global reallocations away from USD assets, rising deficits, and weak debt sustainability eroded confidence. EM currencies and bonds outperformed on capital inflows, with the RMB gaining reserve traction and traditional havens like JPY, CHF, and EUR seeing renewed demand.

US fiscal expansion, including a USD 4 trillion deficit and USD 4.5 trillion in tax cuts, alongside expected Fed rate cuts, is undermining the dollar’s yield advantage and credibility. Trade actions and high debt costs are amplifying volatility, while limited policy offsets like Section 899 offer only short-term USD support.

The dollar continues to attract short-term safe-haven flows during shocks but weakens as risk appetite returns, pushing capital into higher-yielding EMFX. Gold, the RMB, and reserve currencies like JPY and EUR are increasingly favored for their policy credibility, stability, and alignment with diversification away from USD.

Deficits and Inflation Volatility Undermine Dollar and EMFX Stability

Widening US deficits, Fed easing, and global policy divergence are driving USD weakness, while inflation shocks and geopolitical risks create bursts of FX volatility. Diminishing trust in US fiscal and monetary credibility is accelerating reserve shifts toward currencies like the RMB, especially as subdued oil prices limit petro-currency gains.

Emerging market currencies rallied on disinflation, high real yields, and a weaker USD, with EM bonds returning 12.3 percent in H1, but remain vulnerable to reversals if global conditions tighten. Rising reserve demand for non-USD currencies and policy uncertainty in key sectors threaten EMFX capital flows and currency stability.

FX Positioning Favors EUR, RMB, and Asia Reserve Currencies

Investors favor short USD exposure via pairs like EUR/USD and long EMFX or RMB positions supported by policy stability, reserve growth, and monetary divergence. Hedging with options and pro-cyclical/reserve currency baskets remains common, with regional preferences leaning toward Asia FX for fiscal strength and macro credibility.

USD downside is expected near- and long-term due to weak fundamentals, with long trades in EUR, SGD, CNH, and EMFX like INR and IDR gaining appeal. Fiscal strain and muted stimulus weaken the dollar’s resilience, while low oil prices reduce petro-currency support, bolstering demand for the RMB and surplus economies.

SGD-sensitive investors are deploying options, forwards, and swaps to manage USD volatility, especially amid rising US debt and fiscal fragility. Diversification into EUR, JPY, CHF, and FX-hedged gold helps preserve returns, with hedging strategies increasingly vital as US debt-to-GDP nears 130 percent.

​De-Dollarisation and Fiscal Risk Reshape Global Commodity Strategies

Energy Prices Decline, Gold Rises on Fiscal Concerns

Energy prices are falling due to oversupply and geopolitical easing, while precious metals like gold are rising on US fiscal concerns and dollar weakness; EM exporters benefit from improved FX conditions, boosting commodity-linked capital flows.

US fiscal and trade policies, including tariffs and subsidies under the OBBB Act, are distorting global commodity pricing by favoring fossil fuels, reducing clean energy support, and shifting long-term capital allocation patterns.

Gold outperforms during inflation, dollar weakness, and fiscal risk, while industrial commodities like oil and metals react cyclically to geopolitical shocks and growth sentiment, with oil forecasts signaling ongoing oversupply pressures.

Volatility Elevated by Geopolitics and EM Export Constraints

Commodity markets face heightened volatility from geopolitical tensions, US fiscal stress, and changing monetary policy, with gold benefiting from inflation fears and industrial commodities pressured by elevated yields and supply shifts.

Although EM exporters gain from a weaker dollar and lower rates, infrastructure gaps, volatile capital flows, and US policy redirection constrain their ability to scale commodity exports and maintain funding stability.

Investor Rotation into Fossil Fuels, Gold, and AI Metals

Investors are rotating into fossil fuels, shorting oil post-conflict, and increasing gold allocations as a fiscal hedge, while using currency overlays and long-short positioning to manage volatility across commodity-linked assets.

Copper, rare earths, and fossil fuels are set to outperform on AI spending and fiscal support, while gold continues to rise on inflation and de-dollarisation; EM exporters benefit from weaker USD and China-driven demand.

SGD-sensitive portfolios are using options, swaps, and FX overlays to hedge USD-linked commodity exposure, while gold and local currency investments provide additional protection against inflation and fiscal-driven dollar instability.