Diversify Smart as Geopolitics Up
Chart of the Week:
China’s Two Sessions Open; Beijing Targets Nominal Growth, Prioritizing Sustainable Expansion
On March 5, China opened the Fourth Session of the 14th National People’s Congress. A key focus is the government’s decision to lower the 2026 GDP growth target to a 4.5–5% range, marking the first time a range has been set again since 2016 and 2019. Over the past three years, the official target was 5%. If the 2026 target is achieved, it would represent the lowest growth goal in nearly 35 years.
Major Recap 1:
Geopolitical Tensions Add Turbulence, Near-Term Market Volatility Set to Rise
With no signs of U.S.–Iran negotiations, geopoliticaltensions continue to escalate, pushing oil pricessharply higher and lifting inflation expectations.Higher energy prices have driven Treasury yields upand delayed Fed rate-cut expectations, increasingnear-term market volatility. U.S. equities declined,with semiconductor stocks leading losses, whileEuropean equities fell as rising energy risksdampened growth prospects.
Major Recap 2:
Rising Safe-Haven Demand Channels Flows into Oil and the U.S. Dollar
U.S. ISM Manufacturing, ISM Services, and ADPemployment data all beat expectations, highlightingresilient economic fundamentals. With the U.S.–Iranconflict unlikely to ease soon, markets feardisruptions to Middle East oil supply, lifting globalinflation expectations. Fed rate-cut expectationshave been pushed back and Treasury yields haverisen. In credit markets, shorter-duration high-yieldbonds have seen relatively smaller declines. Risksentiment also turned cautious after the bankruptcyof UK non-bank institution MFS, raising concernsover private credit risks.
What’s Trending:
HALO Investing Emerges as the Next Trend: Heavy Assets Resistant to AI Disruption
Investors continue pouring heavy capex intohyperscale cloud and data center giants, but earningsgains remain slow, fueling concerns over an AIbubble. In response, banks such as Goldman Sachsand Morgan Stanley are promoting the HALO (HeavyAssets, Low Obsolescence) strategy—favoring asset-heavy sectors with low tech disruption—to hedge AIrisks while linking to real-economy growth.
In Focus 1:
War-Driven Volatility Favors Bonds: Quality Income as the Preferred Hedge
Since the start of the year, markets have beenshaken by events including U.S. tariff disputes andthe U.S.–Iran conflict. Investment-grade bonds haveperformed broadly in line with Treasuries, while high-yield bonds lagged as credit spreads widened. Thespread ratio between high-yield and investment-grade bonds has risen, while the gap between thetwo is near a decade low. Meanwhile, corporatecredit trends continue to improve for investment-grade issuers. With Treasury yields easing on safe-haven demand and lower-rated credit spreads lessattractive, locking in bonds from large issuers withsolid fundamentals ahead of potential Fed rate cutsin 2H appears prudent.
In Focus 2:
Persistent Market Risks Favor Diversified Allocation
BofA’s fund manager survey highlights key risks beyondthe U.S.–Iran conflict, including a potential AI bubble,rising inflation, and higher interest rates. The Fed’sincoming chair favors lower rates and balance sheetreduction, while the U.S. Supreme Court’s ruling againsttariffs may require refunds, raising fiscal disciplineconcerns. This could lift term premiums and steepen theyield curve. Meanwhile, Japan’s fiscal expansion andrising JGB yields may add upward pressure to U.S.Treasury yields, supporting allocations to high-qualitycredit.
