Most crises do not generate new trends; instead, they force existing ones into the open. In that sense, the Iran war looks less like the start of a new cycle than an accelerant of one that has already been building.
For years, excess global savings have depressed yields and supported a world of cheap capital. Today, the balance is changing. Defence spending is rising, energy systems are being rewired, supply chains are being duplicated or regionalised, and artificial intelligence (AI) infrastructure keeps demanding ever more investment.
The latest geopolitical shock does not establish that structural shift; rather, it confirms and speeds it up. Thus, interest rates and monetary policies remain central to the outlook. If the world is moving from an abundance of savings to competition for capital, then "higher for longer" rates is not a policy accident but a feature of this decade.
Remarkably, little economic harm has been caused by the conflict in the Middle East and the supply chain obstacles facing the global energy trade. The somewhat surprising response has been to invest in additional defence capabilities or restock them and build alternative supply chains. In addition, the resilience and expansion of AI infrastructure investments are providing another boost to economic growth.
For the second half of 2026, we do not expect a sustained resumption of non-US equity outperformance as long as exceptional conditions in global energy markets persist. In the near term, the strongest earnings momentum remains concentrated in AI-related segments.
We have upgraded the communications sector to overweight, combining accelerating monetisation trends among internet platforms (due to successful implementation of AI) with the stability and attractive shareholder remuneration of telecoms operators.
Beyond AI, valuations outside the US look increasingly compelling. Within cyclicals, we continue to favour sectors leveraged to higher investment spending and remain cautious in consumer-related industries where earnings momentum remains weak.
EMERGING MARKETS
We favour global emerging markets, supported by a softer dollar outlook and earnings tracking that is ahead of expectations, with an outsized contribution of AI-linked Asian markets.
We maintain a preference on China notwithstanding its year-to-date underperformance but acknowledge that the best AI opportunities are likely within the main board indices. A-shares (mainland-listed) have more favourable AI exposure than H-shares (Hong-Kong-listed), and this outperformance will likely continue.
Nonetheless, we still expect a rebound in offshore internet stocks in the second half as competition eases and AI revenue contributions increase. Companies with overseas exposure should also outperform.
In contrast, South and Southeast Asia are mostly dominated by old-economy sectors, but a few markets stand out for idiosyncratic reasons. Singapore has the advantage of a strong currency, is a high-yielding market, and benefits from government initiatives to revitalise the equity market.
India may still face vulnerability from high oil prices in the near term, but the domestic institutionalisation of household savings is a powerful offset to weaker foreign flows, while its structural growth appeal arising from favourable demographics remains intact.
Within fixed income, markets have priced in rather hawkish central bank expectations, which makes real yields more attractive. Moreover, in our view, an overweight duration bias currently has asymmetric risks; current yield levels provide a meaningful cushion for total returns even in the event of a further sell-off. Importantly, inflation expectations have remained well anchored throughout this period.
The base case remains for an easing of pressure on oil prices, which should support core fixed income disproportionately. Ultimately, even as interest rate cuts are not imminent, we still see the risk that growth worries might resurface again, meaning that the US Federal Reserve's next move will more likely be a cut than a hike.
We favour corporate emerging market (EM) debt in hard currencies for alternative risk premiums, and continue to see value in EM local currency debt, as we see higher and more credible real yields in this space.
WEAKER DOLLAR
After weakening in early 2026 on rising expectations of Fed rate cuts, the US dollar rebounded with the outbreak of the Iran war. Episodes of risk aversion, the pricing out of rate cuts, and a positive correlation with oil prices supported the dollar.
Over the longer term, our view of a weaker dollar remains intact, as current account outflows, eventual monetary easing, an unsustainable fiscal stance and arbitrary US policymaking that undermines checks and balances may reduce the appeal of US assets and increase scrutiny of the dollar's valuation.
Gold's reaction to the Iran war raised some eyebrows, as it has apparently failed as a safe-haven asset. We believe this assessment should be more nuanced. While ongoing geopolitical shocks are likely to continue to cause volatility, we still see a favourable fundamental backdrop for gold. We expect central-bank buying to continue and safe-haven demand to return, and reiterate our constructive view on the precious metal.
Kean Tan is Managing Director, Senior Advisor and Head of Investment Solutions at SCB-Julius Baer Securities Co Ltd in Bangkok.
