June’s Signals & Strategy: Lifting The Fog of War

Signals

In geopolitics, the situation is improving. Firstly, the US and Iran have reached an agreement, of sorts. Whether the proposed deal can hold is unclear. It contains contentious points, including the release of frozen Iranian assets and a huge reconstruction fund. We remain hopeful. Oil has dropped as a result, which is helpful for inflation. Secondly, Russia’s invasion of Ukraine is turning sour for Russia, as is the oil price fall. Europe is a major beneficiary of all these outcomes.

The new Fed chairman signalled higher rates ahead, according to consensus. However, making this interpretation is now more challenging, as he has deliberately reduced the clarity of signalling versus his predecessors. The European Central Bank, meanwhile, raised rates by 0.25%. Markets predict one more interest rate hike this year across sterling, dollars, and euros. At the same time, the World Bank has cut its global growth forecast to 2.5%.

At the corporate level, earnings upgrades continue. Tech and AI‑related spending plans are strong, even as hiring plans soften. If a major misallocation of capital is occurring, it will take time to become clear. Meanwhile, generous depreciation policies are boosting earnings in the sector. We are a little baffled by Alphabet’s equity issuance to fund spend when they could have used debt instead; AI capital expenditure is projected to reach more than $700 billion per annum. At that level, depreciation will amount to $150-230 billion per annum.

In debt markets sovereign bond investors had been gloomy in recent months, corporate bond investors less so. Doubts around a resolution to the Strait of Hormuz crisis pushed up bond yields. Meanwhile, equity investors were as optimistic as ever, starting the equity rally ten weeks ago. Negotiations may yet stall, of course, but for now the future is brighter. The successful SpaceX float this month also boosted sentiment – and historically, such events subsequently help push indices higher.

Strategy

In the near term, easing energy prices and progress in US–Iran negotiations support a further squeeze higher in risk assets. The ‘trade’ is still up. Europe, with its energy‑intensive industrial base and previously battered consumer, stands to benefit disproportionately if lower oil prices persist.

Our stance on equities therefore remains constructive. The AI capex super cycle is still the most powerful structural force in markets, and its earnings impact is already measurable. We see equities as the best long‑term hedge against structurally higher inflation.

Within equities, we continue to favour the ‘picks and shovels’ of the new capex cycle. Miners and metals tied to electrification and network reinforcement, infrastructure and industrials linked to power, and grids and data centres across the AI stack stand to benefit. The potential unwinding of the energy shock does not alter the strategic need for energy security and resilience, particularly in Europe and the UK.

Our preference for infrastructure and selected utilities remains in place, reflecting both geopolitical realities and the longer‑term push towards self‑reliance in critical systems. We forecast a strong need to invest in defence globally but are aware the sector may have become overextended in recent quarters.

We also continue our tilt towards European banks, which continue to benefit from a stable credit environment and regulatory easing.

Each month, the Keyridge Multi-Asset desk will provide a candid look at the key market signals shaping our portfolio construction.

- Craig Rippe, Head of Multi Asset at Keyridge UK