As part of our ongoing risk-management approach given developments in the Middle East, we are adjusting our view on Asia ex-Japan equities from Overweight to Neutral. This is a measured move, not a negative call on the region. Consequently, our overall global equity exposure also moves to Neutral.

Vasu Menon
Managing Director,
Investment Strategy,
OCBC

Global equities have entered a more complex phase, with the conflict in the Middle East and rising concerns about an emerging “AI bipolarity” adding to ongoing trade uncertainties.

In our tactical asset allocation, we are moving our position in Asia ex-Japan (AxJ) equities from Overweight to Neutral given the uncertainties facing the Middle East and oil prices. Consequently, we also calibrate our overall exposure in global equities down from Overweight to Neutral.

We remain mindful of potential volatility spikes. Investor selectivity will be critical as markets navigate several uncertainties.

US – AI worries coming to bear

The recent surge in AI-related developments has created significant volatility in the US market. New releases - such as Anthropic’s Claude Cowork features and Alphabet’s Project Genie - have unsettled several parts of the market, with software companies bearing most of the impact. We expect these pressures to persist, and at this stage, we continue to favour semiconductors over software.

We are also seeing a clear rotation in US equity styles, particularly from large caps toward small- and mid-cap stocks. In our view, this shift reflects investors’ increasingly constructive outlook on the US macroeconomic environment. Factors contributing to this sentiment include potential tailwinds from the “One Big Beautiful Bill Act” (OBBBA), expectations of deregulation, and the possibility of fiscal support ahead of the midterm elections. Ultimately, however, sustained market broadening will depend on whether earnings-per-share (EPS) growth can extend meaningfully beyond the tech sector.

Within our tactical asset allocation, we maintain a Neutral stance on US equities. While fundamentals remain solid—highlighted by a large majority of S&P 500 companies beating estimates this earnings season—current valuations are still not compelling enough for us to adopt a more constructive position.

Europe – Pick-up in German industrial production amidst broader AI focus in Europe

German industrial production, which had been declining almost continuously since its 2017–2018 peak, appears to have found a floor last year. Recent manufacturing orders have also risen noticeably. Although some volatility in the near‑term data is likely, these developments offer the strongest evidence so far that the country’s fiscal stimulus is taking effect. The defence industry, in particular, is showing stronger domestically driven demand, which we expect to continue providing support.

For European equities more broadly, supportive factors include positive global macroeconomic surprises and the potential for further stimulus. At the same time, concerns around the macro-outlook and risks related to AI-driven disruption remain present.

Over the longer term, fiscal expansion and increased infrastructure spending across Europe should benefit sectors tied to domestic demand, construction and capital goods. Export-focused companies, however, may face challenges from trade frictions and rising competition. The market is also likely to increasingly distinguish between firms that successfully adopt AI and those that are vulnerable to AI‑related disruption. Companies across sectors—such as software, platforms, media firms and intellectual property (IP) owners—have already experienced notable sell-offs.

Japan – The LDP’s landslide victory

Japan equities have performed strongly following the Liberal Democratic Party’s (LDP) landslide victory in the Lower House election. The Takaichi administration is expected to enjoy a relatively high degree of political stability, allowing it to push forward pro‑cyclical fiscal measures and policy changes. These include growth-oriented investments as well as defence and security initiatives, with limited resistance from opposition parties. Historically, Japan’s equity market has tended to react positively when a single party secures a majority.

Currently, the MSCI Japan Index is trading at 18.5x forward price‑to‑earnings (P/E), which is more than two standard deviations above its long‑term average.

We continue to emphasise several investment themes:

• AI, technology hardware, defence, energy and critical resources
• Domestic demand
• Banks, which may benefit from expectations of ongoing rate hikes and increased loan growth driven by rising capital expenditure (CAPEX)
• Construction and real estate, which typically perform well in an inflationary environment

That said, we will closely monitor the implementation of the proposed expansionary fiscal policies, as these could significantly influence the Japanese yen, interest rate expectations, and ultimately the equity market outlook.

Key near-term events to watch include the FY26 initial budget and tax reform proposals, as well as the mid‑March meeting between Prime Minister Takaichi and US President Trump.

Asia ex-Japan – Shifting to a neutral position as regional markets navigate near term risks

Recent developments in the Middle East have introduced new uncertainties for global markets. Two factors have become important indicators to monitor:

1. potential disruptions to oil flow through the Strait of Hormuz, and
2. risks to oil infrastructure in the region.

Both have contributed to increased volatility in energy markets. Brent crude briefly rose to US$119.50/barrel before settling closer to US$90/barrel at the time of writing. While markets have absorbed these moves relatively well, the backdrop suggests a more balanced investment stance is appropriate.

As part of our ongoing risk-management approach within our tactical asset allocation, we are adjusting our view on Asia ex-Japan (AxJ) equities from Overweight to Neutral. This is a measured move, not a negative call on the region. Consequently, our overall global equity exposure also moves to Neutral.

Despite heightened geopolitical noise, the MSCI AxJ index remains resilient: it is only 7.2% below its all-time high, up 7.0% year-to-date and up 38.9% since 1 January 2025. Valuations also appear reasonable, with the index trading at 13.0x forward price-to-earnings - broadly in line with its 10-year average.

Within the region, we are refining our positioning. We are moving Malaysia to Neutral, and Philippines and Indonesia to Underweight, while maintaining our preference for Hong Kong, China, and Singapore.

In China’s case, while roughly half of its crude oil imports originate from the Gulf and pass through the Strait of Hormuz, the country has built substantial strategic and commercial reserves. Oil and gas also play a much smaller role in China’s power generation mix - at around 4% - compared with the 40–50% reliance seen in many other Asian economies. This provides the Chinese economy with a degree of insulation from short-term energy price swings.

Broader macro considerations are also relevant. Higher oil prices can weigh on global growth and place upward pressure on inflation, complicating monetary policy for central banks that are trying to support economic activity. Historically, this backdrop has been challenging for the US Federal Reserve and its global peers.

There are indications that the US administration is mindful of the economic impact of elevated oil prices and is keen to limit the duration and extent of the conflict. Nevertheless, the path to a quick resolution remains uncertain given the involvement of multiple stakeholders and ongoing geopolitical complexities.

While measures such as the recent announcements of oil reserve releases — including 80 million barrels from Japan and 400 million barrels from the International Energy Agency — have helped stabilise sentiment, it is still unclear whether these actions can fully offset the estimated 11–16 million barrels per day of disrupted Gulf supply.

Against this backdrop, we believe equity markets should reflect a somewhat higher risk premium. The risk-reward trade-off has become more balanced, and a more neutral equity stance allows portfolios to remain resilient while retaining flexibility should conditions improve.

While the situation in the Middle East has introduced additional uncertainties to global markets, we believe there is no need for investors to be alarmed. The long-term fundamentals for Asia ex-Japan remain intact, and the asset class continues to play an important role in a diversified portfolio.

In fact, there are still pockets of opportunity across the region. Singapore equities for example continue to benefit from structural tailwinds supported by strong policy initiatives - including efforts to deepen capital-market development, broaden sectoral listings and reinforce the city-state’s position as a regional financial hub. These supportive dynamics, coupled with the market’s defensive earnings profile, make Singapore an attractive component within Asia ex-Japan exposure.

In this environment, staying diversified across regions and asset classes remains the most effective way for investors to navigate near-term volatility while remaining positioned for long-term growth. Our Neutral stance reflects balance, not retreat, and we continue to seek selective opportunities within Asia ex-Japan as the situation evolves.

China/HK – Policy developments in focus

The onshore A-share equities market has outperformed Hong Kong and China offshore equities over the past month, supported by sector rotation and volatility in the Developed Markets (DM) tech sector. Energy and Materials continue to lead performance across both onshore and offshore markets.

We remain constructive on Hong Kong and China equities overall, with a preference for offshore China equities. Valuations remain reasonable: the MSCI China Index is trading at 11.7x forward P/E, about +0.5 standard deviations above its historical average, supported by an estimated 12% year‑on‑year earnings growth. However, if DM volatility continues to rise, it may justify a tactical shift toward the onshore A-share market.

The upcoming National People’s Congress (NPC) will be a key event. Beyond announcing headline targets such as GDP growth and the fiscal deficit, the government will also release the full 15th Five‑Year Plan (2026–2030). We expect more detailed policy guidance after the NPC, particularly around key priorities including domestic consumption, innovation, and efforts to address “involution.”

In Hong Kong, the FY2026–2027 Fiscal Budget was recently announced. As expected, no major stimulus measures were introduced for the real estate market. The government reaffirmed its commitment to developing the “REIT Connect,” and an amendment bill will be introduced to enable the privatisation or restructuring of REITs.

Global Sectors - Global Energy and Materials lead the pack…

Energy has been the top-performing sector so far this year, driven partly by rising oil prices amid heightened geopolitical tensions in the Middle East. The sector has also benefited from notable multiple expansion across many industries as part of a broader cyclical rotation. Integrated Energy and Energy Services have led the gains, and valuations have now moved closer to their long‑term averages. As a result, further upside in the sector increasingly depends on positive earnings‑estimate revisions, aside from any short‑term spikes caused by geopolitical uncertainty—particularly involving Iran. Fundamentally, the oil market continues to grapple with elevated surplus levels, which may limit sustained price increases.

The renewed market focus on real assets is also evident in the Materials sector. Diversified miners have outperformed, even as gold miners pause after earlier gains. The Industrial Gas subsector has also delivered strong performance, supported by exceptional pricing power and strategic exposure to long‑term structural trends, including the global energy transition. In addition, parts of the Materials sector—such as metals and chemicals—are attracting increased investor interest given expectations of higher demand from ongoing AI‑driven infrastructure build‑outs.

On the other hand, the Consumer Discretionary sector has underperformed year‑to‑date, partly due to investors rotating out of high‑valuation growth names such as Amazon and Tesla - which together make up about 37% of the MSCI ACWI Consumer Discretionary Index - and into more value‑oriented sectors. In addition, cautious earnings guidance from several major European luxury brands and weakening consumer perceptions of the US labour market have further dampened consumer confidence.

From AI‑phoria to AI‑phobia: Markets wrestle with disruption and monetisation concerns

As commercially viable AI applications are rolled out by AI‑native companies, concerns about AI-driven disruption are shifting from theoretical debates to tangible realities. These fears have weighed on equity markets, impacting not only software companies but also non‑tech sectors such as insurance brokers and real estate services, where business models may face long‑term pressure. Investors are increasingly looking past near-term earnings strength and focusing instead on the uncertain long-term growth outlook created by AI disruption.

Within the technology sector, we maintain our preference for semiconductors over software. Semiconductor companies stand to benefit from robust capital expenditure by hyperscalers, whose budgets have been revised over 20% higher post‑earnings, reaching yet another record. However, hyperscalers themselves are now under intensifying pressure to demonstrate meaningful monetisation of AI investments while still maintaining healthy free cash flow. This concern was evident in the share-price reactions following recent results from Microsoft and Amazon—Microsoft faced disappointment over Azure’s slower growth, while Amazon’s stock came under pressure amid expectations of potentially negative free cash flow after its CAPEX upgrade.