April is best summarized as a paradox: equity markets reached new highs, while the most significant risk factor for the global economy, the energy supply, came under further pressure. The ceasefire in the Middle East gave investors confidence, but the closed Strait of Hormuz kept the threat of oil supply disruptions firmly in view. That tension between optimism and vulnerability defines the current investment climate.

 

Equity markets focused on the positive side of this story. Global equities (MSCI AC) rose 10%, with the United States (S&P 500) again leading the way at 10.5%. Emerging markets (MSCI EM) performed even more strongly at 14.5%, while the eurozone (Euro Stoxx 50) managed only 4.8% and the United Kingdom a mere 2%. These divergences are no coincidence - they reflect structural differences in economic growth and energy dependence. The US economy benefits from strong corporate investment and earnings growth, whereas Europe is more exposed to higher energy prices. Notably, the sharp rally in equity markets occurred against a backdrop of persistently high oil prices and a fragile geopolitical situation, suggesting that investors are pricing in a resolution and a swift recovery in energy supply. That is also where the vulnerability lies: if that scenario fails to materialize, both economic growth and earnings expectations will come under pressure. In that light, it is not the optimism itself that matters most, but the extent to which it is already priced into in valuations.

 

The macroeconomic environment exacerbates this tension. The US economy grew by 0.5% on a quarterly basis, while the eurozone managed just 0.1%. This gap is partly explained by robust investment activity in the United States, while Europe continues to rely on a less dynamic services sector. Inflation remains central to the picture. Eurozone inflation stands at 3.0%, above central bank targets, creating a classic dilemma: higher energy prices call for tighter monetary policy, while weak growth calls for stimulus. Central banks are opting for caution and keeping rates on hold for now, but the room to ease is limited. This creates an environment in which financial markets remain vulnerable to disappointing inflation data or unexpected policy shifts.

 

This backdrop also explains developments in bond markets. Ten-year yields rose to 4.39% in the US and 3.03% in Germany. The fact that yields are rising despite geopolitical uncertainty is telling: inflation is currently weighing more heavily than demand for safe-haven assets. For investors, this means government bonds offer less protection against shocks, as rising yields push down the value of existing holdings. Within credit, risk premiums tightened again, with spreads returning to relatively low levels. This points to confidence in corporate creditworthiness, but also to limited compensation for the risk being taken. Taken together, bond markets find themselves in an uncomfortable position: fundamentals remain solid, but the price investors are paying for safety and yield is relatively high. This is why a cautious stance here remains appropriate.

 

Commodity markets show the most direct impact of geopolitics. Oil prices moved sharply, with highs above 120 dollars per barrel before settling around 114 dollars. This move reflects not only uncertainty but also the strategic importance of the Strait of Hormuz for global energy supply. Notably, gold remained relatively stable around 4,600 dollars per troy ounce. Although gold traditionally acts as a safe haven, this effect was neutralized by rising rates, which reduce the appeal of holding non-yielding assets. For commodities broadly, the picture is mixed: energy prices remain hostage to geopolitical developments, while other factors are limiting gold's traditional role.

 

Our approach is one of balance between optimism and prudence. Financial markets seem to be shrugging off the current disruption, expecting it to pass quickly. We are more cautious: the economy needs time to adjust to elevated energy costs and persistent inflation. Equity valuations have already run up substantially, leaving  little room disappointment. Should rates remain high or growth slow, current corporate earnings expectations may prove too optimistic. We are monitoring developments closely and are not adding directional tilts to our equity-bond allocation. We are not actively seeking out risk, but we remain broadly invested.

 

Please find attached our last Asset Allocation Update for May.