Investors who were rushing out of equities to stay in cash came rushing back in as risk assets rallied against consensus expectations. Bank failures in the US were contained by regulators and the US debt ceiling eventually found bipartisan consensus. However, it was arguably greater levels of liquidity and optimism on artificial intelligence that drove market returns. While the adoption of artificial intelligence may indeed drive productivity gains, regulation and monetization remain unclear. We note that the nature of disruption is non-linear, and disruptors may themselves be disrupted. We avoid chasing the rally from here as certain beneficiaries look to be priced for much more even if the anticipated boom does come to pass. Valuation discipline is a core part of our portfolio construction process, and we shudder at positions priced at multiples of sales rather than earnings. Our preferred asset classes have outperformed year to date, as emerging market bonds outperformed their developed market peers while Japan equities hedged for FX outperformed their US counterparts. In addition, our dashboard of liquidity measures indicate that liquidity may be much less supportive from here.

We discuss our outlook and the factors we see as key to drive markets going forward below :