View From The Top: Disconnected

View from the very top: No-one wants to be seen to be missing out on a rally. Investors have continued to ride the momentum in equity markets, supported by improving corporate profitability and rising earnings estimates. At the same time, none of the big issues have gone away. Economic growth was already slowing even prior to the still unresolved conflict in the Middle East. Significant investment continues into the AI complex, while returns remain unproven. There are second-order implications for software and private credit too. At some stage, there will need to be a reckoning. Government deficits are expanding and fiscal dominance may become the new normal. In a world where prior rules-based order has been effectively shattered, investors should prepare themselves for heightened and more frequent volatility. Ongoing asset class diversification remains the most logical investment strategy.

Asset Allocation:

Equities: Stock markets globally priced an end to Middle Eastern conflict and focused on ongoing earnings momentum during April. Pre-War losses were recovered mid-month for the S&P 500 Index, which reached an all-time nominal high on 30 April. Globally, the past month has been the best for equities since November 2020. Pullbacks are only normal and should be expected. Near-record performance also hides major disparities. Growth has outperformed value and the US relative to other regions. 17.1% annualised earnings growth for the MSCI World Index, per Bloomberg, masks underlying weakness at many businesses (particularly consumer-facing ones). Truly active managers with different and diversified strategies look well-placed.

Fixed income/ Credit: Recent events constitute another proof point about how government debt (especially if longer dated) does not act as a diversifier or source of capital protection. Rising yields reflect the prospects of both potentially higher inflation and more fiscal spending. At the same time, spreads across the credit spectrum are widening, albeit from a low base. A more fragile economy would create additional pressure, while concerns over private credit quality have not gone away. Our allocations to this space remain highly selective.

Currencies: The recent recovery in risk assets has boosted other currencies at the expense of the US Dollar. The DXY Dollar Index experienced its worst month in April since August 2025, according to Bloomberg. Emerging market currencies have been major beneficiaries. We believe in mean reversion. The US Dollar continues to see consistent challenges but replacing it as the global reserve currency will take time. Focus instead on broader asset diversification.

Gold: The precious metal may be down c15% from its 2026 high but remains up for the year, and has delivered substantial returns for investors over the past few years. We continue to see an upward trajectory, for gold represents a crucial diversifier. Not only is it inversely correlated with the US Dollar, but it also serves as a hedge, particularly in an environment of potential fiscal and monetary debasement. Central Banks are continuing to add to their allocations.

Alternative assets: Hard assets should be well-positioned to benefit in periods of regime change and uncertainty (as well as those of higher inflation). Alternative assets can exhibit resilience as well as offering both portfolio diversification and income-generating characteristics. We favour selective investments, particularly in uncorrelated strategies.

What matters most on Wall Street: rising corporate earnings growth, or an ongoing conflict taking place almost 8,000 miles away over a currently blocked 100-mile strait of water? Investors have shown a remarkable tendency to climb metaphorical walls of worry; they are also increasingly conditioned to buy the dips. Little does it seem to matter if US consumer sentiment is at an all-time low or that inflationary issues and deepening deficits may constitute creeping challenges. These are concerns for another time. Lean-in, then, for now, but continue diversifying and stay nimble.

Market bubbles may be driven by greed (and crashes fuelled by fear), but separating optimism from hubris remains a challenge for many. The most pragmatic strategy is to recognise what matters for the very near-term, while continuing also to optimise for the longer-term. Put another way, the all-time nominal highs being enjoyed by equity markets are a function of the rate of year-to-date earnings revisions for the S&P 500 Index growing well ahead of their historic average. Rolling forward 12-month earnings estimates are 10% higher than at the start of the year (per Bloomberg). Markets rarely peak under circumstances like these.

Pause for a minute, however. There is nothing to suggest that we are close to a lasting resolution in the Middle East. The Strait of Hormuz has been effectively shut for two months. Even if it were to reopen tomorrow, for how long this would endure remains unknown. Normalisation to a pre-Gulf War Three status of traffic through the Strait will take a very long time. Against this background, it is naïve to believe that there will be no enduring impact. Consider how costs are continuing to compound across freight, refining, supply chains. US gas station (petrol) prices are more than 70% higher than a year prior, says the IEA.

This dynamic perhaps explains why not all asset classes have fully bought into the rally in equities. Some might call it a disconnect. Credit spreads are widening, yields remain elevated and the oil price is still stuck at around $100 a barrel. Prior to the attacks on Iran, oil traded at less than $70 per barrel, while US ten-year Treasury debt yielded below 4%. It now yields over 4.3% (all data per Bloomberg).

Even if we were to give equities the benefit of the doubt – for there may be no better alternative – and carry on riding the current wave of earnings momentum, some investors may want to reflect on the fact that none of the big debates has gone away. Conflict in the Middle East has simply put them on hold.

It is still not clear whether the significant sums of capital being ploughed into AI infrastructure build will generate any meaningful return for investors. Might investors then be overpaying for growth that might never materialise? Equally, might software rapidly become obsolescent? If so, what are the implications for private credit? It’s simply too soon to know. Don’t try and price uncertainty – just look through it. No-one want to be seen to be missing out on a rally.

What about the economy? The current macro signals are mixed but ultimately resilient. Cynics, of course, might, observe that all published data are backward-looking. There’s a fine line between resilience and subtle deterioration. Surveys, meanwhile, only capture a snapshot of sentiment rather than an economy where there appear to be ever-widening disparities between top and bottom earners.

Even so, a balanced reading of the latest economic indicators is not without cause for concern. Sure, hiring has shown no marked sign of slowing and consumers are continuing to spend – for now. These trends may not endure, given that US consumer sentiment currently stands at its lowest on record, according to one survey (by the University of Michigan). Another (from Gallup) suggests that a greater share of Americans believe that their financial situation is getting worse than at any time in the last 25 years.

Perhaps none of this should be surprising given that headline US CPI inflation is running at 3.3% - the highest in four years. On another metric (personal consumption expenditure – favoured by the Federal Reserve), it has averaged 4.3% over the last three months. GDP grew at an annualised rate of 2.0% in the first quarter of 2026, below Bloomberg consensus for 2.3%. Bear in mind that the prior quarter’s GDP print was revised down twice. In other words, pre-War, the economy may already have been slowing.

Even if investors may be willing to look through short-term disruption and price a more normalised environment, the path forward will not be smooth. Consider the time it will take for oil supply to stabilise again out of the Middle East. Potentially longer trade routes and more frequent interruptions could elevate prices. Countries will also need to replenish drawn-down fuel inventories. Equally, higher input costs will need to work their way into food prices, and other areas such as airfares. A wartime calculus naturally throws corporate planning into disarray.

To the extent that the COVID-19 pandemic or the Russia-Ukraine war may serve as precedents, pain may become more real before it diminishes. Remember, that while investors may care most about the rate of change, consumers work in absolutes – and don’t like high prices. More expensive fuel and food are effectively taxes on growth.

America has it relatively good compared to other nations, since it is a net exporter of fuel, given its substantial shale oil and natural gas. Japan, however, imports around 80% of its energy requirements. The figure is over 40% for India and for the Eurozone too (all data per the Energy Institute). Assume these countries feel the heat from higher prices and uncertain supply. Were Europe or Asia to go into recession in the next 12 months, then it is hard to imagine the United States unaffected. All major forecasting bodies and data providers (Bloomberg, IMF, OECD and World Bank) are pointing to a slowing of economic growth in 2027. None calls for a recession.

Policymakers, of course, have tools at their disposal. The challenge, however, is the constraints by which they are bound. With inflation (and, more importantly, inflation expectations) on the rise, then policymakers may be reluctant to lower interest rates. Central Banks tend to err on the side of caution, particularly until the full impacts of any crisis may be known. At the same time, any fiscal stimulus undertaken will occur against a backdrop of already-large government deficits. Highly indebted countries are being forced into ramping up spending on defence and energy. The new mindset is one of just-in-case, as opposed to perhaps a greater pre-War complacency.

Interest rate cuts and more financial largesse are both possible. Notwithstanding the appointment of a new Chair of the Federal Reserve (Kevin Warsh), inflation has become a political issue, whether you like it or not. At the same time, fiscal dominance could become the new normal. Under this scenario, a government's high debt and large budget deficits may force the central bank to prioritise financing the government over controlling inflation. Keeping interest rates artificially low or buying government debt, would create additional inflationary pressures. Were equity markets (or at least, the S&P 500 Index) to drop more than 10%, then recent precedent would suggest some reaction from the Trump administration. Its historic tolerance for drawdowns has been limited.

To close, it’s important to frame all the above in a broader context. Investors need to recognise – and correspondingly position for – the fact that the post-World War II rules-based order is effectively over. This implies higher and more consistent volatility, both in the geopolitical arena and from an investment perspective. However disconnected the very near-term may appear, it pays to continue diversifying.

Alexander Gunz

Fund Manager