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Executive Summary

Market review: Higher price & volatility

Markets ended October higher overall, but not without a few twists along the way. ‘TACO’ trade: markets dropped in the first half of the month as US-China frictions intensified, before ending the month up on a one-year trade truce. The S&P 500 (2.3%) advanced in October, led by the Magnificent 7 mega-cap names on the back of resilient earnings and AI optimism following new partnership announcements. Bitcoin slipped 4.6% alongside a firmer USD. After a strong stretch of gains in prior months, investors appeared to take profits as attention shifted back toward traditional assets.

Stability Amid VUCA

AI: Can the momentum continue?

Artificial Intelligence (AI) has been an important engine for markets in recent times. Will this last?

Bulls say:

  • AI rally remains grounded in fundamentals, with earnings growth justifying.
  • Hyperscalers guiding for even higher AI-related spending in 2026.
  • Momentum broadening beyond tech giants to segments such as data-centres, utilities, etc.

Bears say:

  • Valuations have raced ahead of fundamentals.
  • History reminds us that genuine innovation can still face over-optimistic expectations e.g. dot-com boom.
  • Markets are highly concentrated in a few mega-cap names, raising vulnerability to any earnings disappointment.

Economic Growth

AI: What to look out for?

The AI-theme remains supported by earnings for now. We maintain exposures but with greater diversification across our holdings to reduce concentration risks while keeping a close watch on turning points ahead: High valuations leave less room for disappointment. That said, valuations can stay elevated so long as earnings growth continues to deliver. The next phase hinges less on excitement and more on execution: watch closely for any signs of earnings growth moderating or valuations running ahead of profit momentum. Any slowdown in AI-related capex spending could ripple through the broader market. We are also monitoring how all this spending is being financed: while they are still funded from strong cash flows today, a shift toward greater reliance on debt could be an early warning sign.

 

Vuca

Navigating fixed income

Fed cut, but yields rose: The Fed’s 0.25% rate cut sparked volatility as Chair Powell signalled further easing isn’t guaranteed. Long-term yields bounced, reminding investors of the risks of timing the Fed. Maintain short-to-mid duration bonds: Investors earn little extra for extending maturity while being exposed to higher volatility. Be selective: Credit spreads tightened to near multi-decade lows, leaving lower buffer if sentiment turns. Focus on higher-quality income that offering better resilience in volatile periods. EM Asia as a diversifier: A ceasefire in the Middle East and a U.S.–China trade truce eased geopolitical risks. Stronger fiscal discipline and monetary stability now make EM bonds a useful source of yield and diversification.

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