Markets are evolving in an environment dominated by liquidity dynamics and concentration around artificial intelligence. For Christian Luchsinger, however, monetary policy remains the main factor likely to trigger a market disruption. In this interview, he analyses price formation, the role of capital flows and the conditions for a sustained period of higher volatility.
You describe a market caught between geopolitical détente and monetary tightening. In your view, which factor currently presents the greatest potential for a market disruption?
Geopolitics remains a significant source of volatility, but its nature has changed. Markets now tend to view geopolitical events as one-off shocks rather than factors likely to bring about a lasting change in the economic landscape. Episodes of sharp geopolitical escalation trigger immediate market reactions, but their effects quickly fade if they do not bring about a lasting change in growth, inflation or financial conditions.
Recent tensions around the Strait of Hormuz, as well as ‘Liberation Day’, perfectly illustrate this phenomenon. The markets quickly priced in extreme tail-risk scenarios, anticipating a sharp rise in oil prices and prolonged disruptions to supply chains. However, these scenarios did not materialise. Geopolitical risk is therefore now priced in much more tactically. It fuels short-term volatility but rarely calls into question medium-term strategic asset allocations.
Conversely, monetary policy remains the main factor likely to trigger a genuine break, as it directly affects the fundamentals underpinning valuations: discount rates, liquidity, credit conditions and risk appetite. We are no longer in a predictable cycle of falling interest rates, but in an environment characterised by significant uncertainty regarding the future path of central banks.
The US Federal Reserve, in particular, is now adopting a more restrictive approach in its response. Its concern to preserve its credibility in the face of inflation is now coming into conflict with the imperatives of financial stability. This development significantly broadens the range of interest rate paths to be considered. In this sense, monetary uncertainty has become a source of disruption that is more structural and persistent than geopolitical risk.
Can a de-escalation in the Strait of Hormuz really lead to sustained disinflation, or is this merely temporary relief linked to supply-side factors?
For such a trend to have a lasting effect, there would first and foremost need to be a marked slowdown in global demand. A mere improvement on the supply side – thanks to a fall in oil prices, for example – is not enough to trigger a genuine process of structural disinflation.
The global economy is currently showing remarkable resilience. Growth is being underpinned by several investment cycles, particularly in infrastructure linked to artificial intelligence, the expansion of industrial capacity, and targeted fiscal policies in several major economies. These dynamics are not disinflationary and continue to fuel underlying price pressures.
The fall in energy prices therefore mainly affects headline inflation, without necessarily impacting core inflation. This distinction is crucial. A decline in energy costs does not automatically translate into a sustained fall in inflation as long as services and wages remain buoyant.
Furthermore, persistent structural frictions in global supply chains are limiting the pass-through of lower energy prices to underlying inflation. Even against a backdrop of falling oil prices, this pass-through effect remains relatively weak.
Finally, the geopolitical risk premium built into energy markets has not completely disappeared. Even during periods of calm, a certain premium remains as long as trade flows, logistics networks and insurance conditions have not fully returned to normal. What we are seeing today therefore corresponds more to a partial easing in a still fragile environment than to a genuine regime shift.
Does the fact that the Fed is now prioritising its credibility in tackling inflation over market stabilisation signal a sustained period of greater volatility for risky assets?
Yes. This is not merely a communication adjustment linked to the economic cycle, but a shift in priorities. The Federal Reserve now attaches greater importance to its credibility in the fight against inflation than to the short-term stabilisation of financial markets.
Compared with the period following the financial crisis, when central banks intervened swiftly to support the markets, the current framework is significantly more asymmetric. The threshold for intervention is higher and responses are less immediate. The famous ‘Fed Put’ has therefore not disappeared, but it is probably less reliable, slower to materialise and subject to stricter conditions than in the previous cycle.
The reduced use of forward guidance also reinforces this uncertainty. Markets have less visibility on the central bank’s reaction function, which increases uncertainty regarding future interest rates, their timing and the scale of monetary policy decisions. This uncertainty translates directly into greater volatility.
Overall, there are many signs pointing to a regime of structurally higher volatility, with less dampening from central banks. Central banks will remain on hand in the event of a major crisis, but their ability to smooth out intermediate cycles is likely to diminish significantly.
The IPOs of SpaceX, OpenAI and Anthropic are being presented as historic events for the markets. Do you see this as a broadening of the equity market or a structural rotation at the expense of the current components of the indices?
We are operating within a hybrid regime, combining an industrial investment cycle with highly reflexive market dynamics. Fundamentally, investment in AI infrastructure is very real, visible and extremely capital-intensive. Demand for computing power, semiconductors and data centres is fuelled by a multi-year investment cycle among major cloud service providers. Companies such as Nvidia are at the heart of this dynamic.
At the same time, the ecosystem that has developed around OpenAI has profoundly reinforced the perception of artificial intelligence as a general-purpose technology, leading to a revaluation of the entire value chain. Against this backdrop, an initial public offering (IPO) by OpenAI or Anthropic would extend this cycle to the listed markets.
The question is whether these listings will broaden market participation or whether they will further exacerbate concentration by adding new megacaps to indices that are already highly concentrated.
The real challenge, however, lies in the stability of market expectations. The markets are currently pricing in an almost linear scenario of continued growth in investment, monetisation and productivity gains. This optimism creates a fragile equilibrium. The concentration of indices no longer merely reflects fundamentals; it is also fuelled by passive flows and momentum strategies.
The main risk is therefore not the end of the artificial intelligence theme, but a change in marginal conditions, which could trigger a sharp revaluation even if the underlying trend remains intact.
How should investors manage the risk of this concentration around artificial intelligence reversing?
Investors must understand that this is not simply a matter of sectoral diversification, but a structural concentration around a few factors linked to artificial intelligence. These include the intensity of investment, demand for semiconductors and liquidity conditions that underpin the growth of megacaps.
The main risk lies not in a collapse of the AI theme, but in a shift in marginal expectations regarding a limited number of dominant stocks. When investor positioning, market narratives and capital flows converge, sensitivity to even the slightest change in these drivers becomes considerable.
Risk management therefore involves, first and foremost, identifying and reducing hidden factor exposures, rather than merely relying on apparent sectoral diversification. Many portfolios that appear diversified remain, in reality, heavily dependent on the same AI-related cycle. The aim is not to avoid all exposure to AI, but to ensure that it does not become the portfolio’s main risk factor.
Against a backdrop of exceptionally low volatility despite geopolitical, monetary and even stock market risks, is your partial hedging of equities merely a tactical adjustment, or does it mark the start of a more structural shift?
In the current environment, momentum and earnings growth remain the main drivers of prices, particularly in the most concentrated segments such as artificial intelligence-related stocks. Inflows are driving performance, which in turn attracts further inflows. Trends can thus persist well beyond what fundamental models alone would suggest.
In this context, our partial short position in equities is clearly a tactical adjustment rather than a structural change to our strategic allocation. It reflects, above all, a desire to manage asymmetric risks in segments where concentration is particularly high.
In particular, we monitor developments in real interest rates, central bank communications and investor sentiment. It is often these factors that trigger regime shifts, even when fundamentals show little change.
Ultimately, a disciplined investment process involves respecting market momentum whilst gradually reducing exposures when crowding-in and asymmetric risks become predominant.