Capital Rotates to AI-Driven, Defensive, and Global Opportunities

Global investors are rotating from US mega-cap tech into international equities, short-duration credit, and commodity-linked inflation hedges, as rising bond yields, a weakening dollar, and AI-driven demand reshape market dynamics. SGD portfolios are responding with defensive allocations, structured instruments, and tactical FX and commodity strategies to manage volatility and preserve returns.

Key Points

• Global equities have gained nearly 20 percent since April, but investor focus is shifting from US mega-cap tech toward diversified international sectors, defensive and income-generating stocks, driven by valuation pressures, policy uncertainty, and supportive fiscal trends, with SGD portfolios using options strategies for protection.
  
  
• US 30-year bond yields have risen above 5 percent due to persistent inflation, fiscal imbalance, and increased term premium demands, fuelling volatility and a rotation into BBB/BB bonds, short-duration high-yield instruments, private credit, and diversified fixed income strategies in SGD portfolios.
  
  
• The US dollar has weakened 10 percent since January amid eroding macro confidence, inflation expectations, and trade tensions, prompting selective FX positioning, with SGD portfolios employing structured notes, private credit, and currency hedging in response to global divergence and emerging market volatility.
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• Commodities have delivered 11 percent annualised returns over five years as precious metals outperformed oil, with future demand supported by tariffs, AI investment, and European infrastructure, while SGD-based portfolios use commodities as tactical inflation hedges through structured tools and long-short strategies amid heightened volatility.

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​AI, Defence, and Healthcare Drive Global Equity Reallocation

Capital Rotation into Resilient and Diversified Sectors

Global equities have rebounded nearly 20 percent since April, but beneath the surface, capital is rotating away from overexposed US mega-cap tech stocks toward broader and more geographically diversified segments amid downward revisions to earnings and valuation concerns.

Government fiscal measures in the eurozone and structural trends in emerging markets, including AI and digitalisation, are lifting equity valuations, while increased defence spending and IP-focused AI platforms are benefiting from targeted policy support.

Investors are reallocating from hardware-based tech to scalable, service-oriented models like cloud and AI, favouring sectors with stronger margin durability, lower valuation risk, and resilience in infrastructure, healthcare, and digital services.

Tech Volatility and Emerging Market Headwinds Persist

Tech equities remain volatile due to elevated valuations, slowing growth, inflation risks, and policy uncertainty, with reduced investor confidence in large-cap leaders like the Magnificent 7 highlighting rising competitive pressure and regulatory vulnerability.

Despite attractive valuations, emerging markets face persistent headwinds from currency volatility, political risk, and infrastructure limitations, with short-term export relief failing to address structural gaps in funding and logistics.

Focus on Scalable, Defensive, and Yield-Oriented Equities

Capital is shifting into undervalued international segments and companies with scalable platforms and defensible IP, particularly in AI and healthcare, as monetization strategies aligned with valuation support and policy stability gain traction.

Artificial intelligence, European defence, and healthcare offer compelling long-term equity themes due to their innovation momentum and resilience, while utilities and consumer staples provide stable, income-generating opportunities in a decelerating macro environment.

Broader geographic diversification, options-based hedging, and strategic allocation into yield-generating sectors are key for SGD-based investors managing volatility, especially amid USD fluctuations and concentrated exposure in US equities.

​Rising Yields Drive Shift to Short-Duration and Private Credit

Rising Yields Drive Short-Duration Bond Rotation

Thirty-year US bond yields have risen above 5 percent amid persistent inflation and long-term fiscal pressures, while a projected debt-to-GDP increase to 130 percent by 2034 and potential foreign investor retreat may further elevate yields.

Elevated inflation expectations, stagnant core PCE inflation, and tariff-induced price pressures are steepening yield curves and sustaining duration risk, as central banks like the Fed and Bank of England signal limited easing.

Investors are rotating into BBB and BB-rated bonds and private credit to capture yield with lower default risk, favoring short-duration instruments and structured notes to manage spread volatility and interest rate exposure.

Debt and Inflation Fuel Bond Market Volatility

Rising inflation expectations and a growing US fiscal burden, with debt now at USD 36 trillion, are driving bond market volatility and reinforcing investor demand for higher term premiums despite muted credit downgrade reactions.

Emerging market bonds face instability from geopolitical tensions, trade-related shocks, weak Chinese stimulus, and declining USD inflows, constraining capital support and amplifying outflow risks.

Active Credit Strategies Support Yield Resilience

Investors are tactically shifting toward short-term high-yield bonds and structured products to navigate credit spread compression, balancing yield generation with reduced sensitivity to macro uncertainty.

Attractive valuations in private credit, eurozone sovereigns, and US/UK investment-grade bonds are driving inflows, supported by stable rate environments and fiscal backing, with real asset-linked instruments offering additional illiquidity premiums.

Active fixed income strategies using rate swaps, currency hedging, and structured notes are helping SGD-based investors buffer against tight spreads and FX risk, while diversified allocations into securitised and EM credit enhance yield resilience.

​Dollar Weakness and FX Volatility Reshape Global Currency Strategies

US Dollar Weakens Amid Capital Rotation

The US dollar has fallen 10 percent since January due to reduced macroeconomic confidence and capital rotation into undervalued international markets, supporting emerging market currencies despite risks from ongoing US-China trade tensions.

A controlled easing path from the Bank of England supports the pound, while global policy shifts and weakening US trade and fiscal metrics increase FX volatility and reduce demand for dollar-denominated assets.

Currency performance is increasingly tied to political stability and trade exposure, with the renminbi and Australian dollar reacting to China’s growth trajectory, while the US dollar faces pressure from declining reinvestment flows in risk-off settings.

China Fragility Drives FX Volatility Risk

Rising US inflation expectations and 10 percent dollar depreciation are intensifying FX volatility, as political and trade uncertainty weigh on the euro and renminbi against the dollar.

Persistent weakness in China’s property sector and structural imbalances are increasing depreciation risk for the renminbi, while emerging market currencies remain exposed to US tariffs, commodity shocks, and political instability.

Targeted Currency Strategies Support SGD Portfolios

Targeted emerging market currency strategies aligned with inflation and policy flexibility are preferred, while sterling gains from improved trade sentiment and the yen’s complex profile demands vigilant FX management.

Dollar downside is likely as Fed easing progresses, while the euro and yen face mixed prospects depending on rate paths, inflation trends, and global risk sentiment.

SGD-sensitive portfolios are using structured-rate notes, private credit, and forward currency strategies to navigate FX volatility, enhance income stability, and capture cross-market yield opportunities.

​AI and Infrastructure Spending Fuel Tactical Commodity Demand

Strong Returns and Shifting Commodity Demand Drivers

Oil has weakened while precious metals outperformed, with commodities delivering over 11 percent annualised returns over five years; forward returns are projected at 1.7 percent, still favourable relative to historical averages.

US tariff actions and reversals in April disrupted global supply chains and inflated input costs, while Germany’s €500 billion infrastructure fund is expected to raise long-term commodity demand.

Precious metals outperform during economic slowdowns due to safe-haven demand, while industrial metals benefit from growth trends like digitalisation and AI investment.

Tariff Volatility and Emerging Market Constraints Persist

Commodity markets remain volatile due to April’s tariff shocks, inflation pressures, and shifting interest rate expectations, with input costs rising across energy and agriculture.

Emerging markets face output limitations due to infrastructure shortfalls and policy uncertainty, particularly in China, affecting commodity production and pricing stability.

Tactical Hedging Supports SGD Portfolio Stability

Commodities are used tactically for inflation hedging, with long-short and sector-based strategies helping navigate price dispersion and macro volatility.

Precious metals and industrial inputs like steel and copper are gaining support from geopolitical risk, European infrastructure spending, and AI-driven resource demand in emerging markets.

SGD-based portfolios use futures, options, and structured-rate notes to manage commodity-linked volatility, currency risks, and preserve income stability.