We maintain our constructive stance on global equities with an Overweight position in the US, offset by our cautious view on Europe. Recent weakness in technology stocks has weighed on Asia's tech-focused markets, but long-term fundamentals support the AI investment cycle.

Eli Lee
Managing Director,
Chief Investment Strategist,
Bank of Singapore

July was a reminder that markets can move quickly as technology, geopolitics and policy developments continue to reshape the investment landscape. China demonstrated further progress in technology and innovation, while performance within the global technology sector became more uneven. At the same time, geopolitical tensions highlighted vulnerabilities in critical supply chains and energy transportation routes.

In this environment, maintaining a balanced and diversified portfolio remains important. While short-term market swings can create uncertainty, long-term investment opportunities continue to emerge across regions and sectors.

We remain moderately positive on equities overall. We continue to favour US equities, remain cautious on Europe, and hold a neutral view on most other regions. Within Asia excluding Japan, however, we have upgraded Taiwan from Neutral to Overweight, joining China, Hong Kong and Singapore as our preferred markets.

At the sector level, Healthcare has become more attractive after a prolonged period of underperformance. We therefore upgrade Healthcare from Neutral to Overweight. Meanwhile, following a period of strong gains, we downgrade Utilities from Overweight to Neutral. Our preferred sectors are now Information Technology, Communication Services, Healthcare and Materials.

To navigate current market conditions, we continue to favour a barbell strategy that combines Quality Growth and Low Volatility stocks. Quality Growth companies typically offer strong earnings growth, healthy balance sheets and attractive returns to shareholders. Low Volatility stocks can help reduce portfolio risk and provide diversification during periods of uncertainty.

United States: Resilient earnings

Investors continue to face several concerns, including the sustainability of AI-related spending, uncertainty surrounding Federal Reserve policy, and geopolitical developments that could disrupt energy markets.

While these issues deserve attention, the recent second quarter earnings season has shown that Corporate America remains resilient. A large majority of S&P 500 companies have delivered earnings that exceeded expectations, indicating that businesses continue to adapt well despite a challenging environment.

The technology sector remains a key area of focus. Recent guidance from major technology companies suggests that investment in artificial intelligence infrastructure remains strong. Large technology firms continue to increase capital spending as demand for AI-related products and services grows.

The banking sector has also produced encouraging results. Consumer spending has remained relatively healthy, loan delinquencies have been lower than expected, and capital markets activity has supported earnings.

Looking ahead, investors will begin focusing on the US midterm elections. Historically, equity markets have often traded within a range in the months leading up to elections before performing more strongly afterwards.

Overall, we remain constructive on US equities. Strong corporate earnings, continued innovation and resilient economic activity continue to support our positive outlook over the next 12 months.

Europe: Balancing growth and inflation risks

Europe faces a more delicate balance between supporting economic growth and controlling inflation.

Following its recent interest rate increase, the European Central Bank continues to monitor inflation pressures closely. Energy prices remain a key concern, particularly given ongoing geopolitical tensions in the Middle East. Natural gas prices have risen, driven partly by summer heatwaves and concerns over energy supplies ahead of winter.

Corporate earnings have generally been supported by the Energy and Financials sectors. Investors have also shown renewed interest in value stocks, which may benefit from a higher interest rate environment and improving earnings momentum.

Germany's planned fiscal support measures could provide a boost to economic growth over time. However, it may be premature to expect Germany to outperform the broader Eurozone in the near future.

Given these factors, we continue to maintain a cautious stance on European equities. We prefer companies with strong competitive positions, pricing power and resilient business models that can better withstand economic uncertainty.

Japan: Structural themes and market volatility

Japanese equities experienced some weakness during July as volatility in global technology stocks weighed on sentiment.

The Nikkei index, which has significant exposure to technology and semiconductor companies, was affected more than the broader market due to declines in chip-related shares. As a result, equity valuations have become more reasonable after previously reaching elevated levels.

The Bank of Japan kept interest rates unchanged while modestly improving its economic outlook. Policymakers also highlighted that inflation may remain above the central bank's target.

Despite near-term uncertainty, we believe investors should focus on Japan's longer-term structural reforms. The government has reaffirmed its commitment to supporting economic growth through public and private sector investment, infrastructure spending and productivity improvements.

These reforms could help strengthen Japan's growth prospects over time, even if short-term market volatility remains elevated.

Asia ex-Japan: Prefer China, Hong Kong, Taiwan and Singapore markets

Technology-related weakness affected Asian markets during July, particularly those with higher exposure to semiconductor and technology companies. However, we continue to see strong long-term fundamentals supporting the global AI investment cycle.

As a result, we have upgraded Taiwan equities from Neutral to Overweight.

Taiwan's stock market is heavily influenced by Taiwan Semiconductor Manufacturing Company (TSMC), the world's leading advanced semiconductor manufacturer. The company recently increased its revenue growth and capital expenditure guidance, reflecting strong demand for AI-related chips. Supply chain expansion plans also suggest that major production bottlenecks are unlikely in the near term.

Consequently, our preferred markets within Asia excluding Japan are China, Hong Kong, Taiwan and Singapore.

China/HK: Monitor key catalysts

We continue to favour China's onshore A-share market due to its exposure to industrial, technology and service sectors that offer stronger earnings growth potential.

Several developments are worth monitoring.

First, the earnings season may reveal whether growth among large internet and platform companies is stabilising after a period of moderation. Stronger earnings results could support broader market sentiment.

Second, policymakers have reiterated their commitment to supporting economic activity and accelerating the implementation of existing stimulus measures. Continued policy support should help strengthen confidence among businesses and investors.

Third, state-backed investment activity has resumed in China's domestic equity market, providing additional support for valuations. However, investors should expect some volatility in Hong Kong equities as large volumes of previously restricted shares become eligible for trading over the coming months.

Despite these uncertainties, we continue to see opportunities in quality companies that offer attractive dividend yields and resilient earnings.

Singapore: Safe-haven status

Singapore remains attractive due to its stability, strong governance standards and safe-haven characteristics.

Since the introduction of initiatives aimed at strengthening the local equity market, trading activity has improved and investor participation has increased. Small and mid-cap companies have benefited from stronger market interest and a healthier pipeline of new listings.

Singapore's banking sector continues to benefit from strong capital positions and attractive dividend yields. Real estate and REITs remain supported by the country's stable economic environment.

In addition, ongoing infrastructure projects provide opportunities for construction-related companies. Singapore's ageing population is also expected to increase demand for healthcare services and products, creating long-term growth opportunities within the healthcare sector.

Global Sectors: Energy leads, Healthcare improves, AI rules

At the same time, we are making two important sector allocation changes.

We downgraded Utilities to Neutral, as the sector has delivered strong returns and now appears less attractive from a risk-reward perspective.

Dividend yields in the sector are below yields available from longer-dated US government bonds, reducing their relative appeal. In addition, there are growing concerns around electricity pricing, resistance to new data centre developments in some regions, and softer demand related to electric vehicles.

In Europe, rapid growth in renewable power generation has also exposed limitations in electricity grid infrastructure, creating additional challenges.

Healthcare now offers a more compelling opportunity after a prolonged period of underperformance.

Some of the major policy risks affecting the sector are already well understood by investors and appear reflected in valuations. At the same time, advances in artificial intelligence are creating significant opportunities across healthcare and life sciences.

AI is helping researchers accelerate drug discovery, improve clinical development processes and reduce research costs. These developments could support stronger earnings growth over the long term.

For these reasons, we have upgraded Healthcare from Neutral to Overweight.

Although technology and semiconductor stocks experienced a pullback during July, we believe this largely reflects profit-taking following a strong rally.

The broader investment case for artificial intelligence remains intact. Major technology companies continue to increase spending on AI infrastructure, while demand for AI services continues to grow rapidly.

Leading technology firms have announced plans for significant expansion of computing capacity over the coming years. Semiconductor manufacturers are also increasing investment to meet future demand.

We therefore remain positive on the technology sector, particularly companies exposed to semiconductors, data centres, networking infrastructure, storage and AI-related applications.

Recent market weakness may provide investors with opportunities to gradually build exposure at more attractive valuations.