Following a first half of the year marked by volatility in the gold market, a correction in technology shares and uncertainty over interest rates, Andreas Schranz remains convinced of the potential of US equities and the continuation of the investment cycle in AI. He is, however, adopting a cautious stance on bonds and is still waiting for tangible signs before reviewing his position on Europe.
Given the massive purchases by central banks in the second quarter – close to 300 tonnes – do you anticipate a rebound in gold, which has been in sharp decline since January?
That depends on the time horizon. From a structural perspective, we remain positive on gold, but we are more cautious in the short term. Demand from central banks remains a very significant long-term support. These are not merely opportunistic purchases, but rather a structural diversification of reserves and a desire to reduce dependence on traditional reserve assets.
That said, following the correction in the first half of the year, the gold market is still seeking a new equilibrium. Investor positioning and technical factors could keep volatility high in the short term. We do not necessarily expect an immediate V-shaped recovery. In the longer term, however, the case for gold as a portfolio diversification tool remains entirely valid.
The semiconductor sector saw a sharp correction in July. Intel fell by 38 per cent and Lam Research by 33.1 per cent, whilst Nvidia was the only stock to hold up. How do you explain this decline in the semiconductor sector?
I would interpret this correction primarily as a ‘sell the news’ reaction, rather than as a challenge to the overall investment case for AI. The fall began just a few days after Micron, one of the flagship stocks of the latest AI rally, reported exceptional results at the end of June. In a way, these results confirmed what the market had already anticipated and priced in.
We have seen similar patterns before, notably following the release of exceptionally strong results by Nvidia. When investor expectations and positions are already very high, excellent results can trigger profit-taking. Furthermore, valuations had reached high levels in certain segments of the sector. Investors have also begun to distinguish between companies directly exposed to the most promising segments of AI and those facing more specific challenges or cyclical factors.
We do not view this correction as a sign of a weakening in the investment cycle for AI-related infrastructure. The latest results from the hyperscalers clearly confirm this. The structural outlook for AI remains intact, but after a very sharp rise, the market needed to take a breather. We should now see greater differentiation between the winners and the losers.
Kevin Warsh left interest rates unchanged in July without giving any clear indication of the Fed’s intentions. To what extent does this lack of visibility influence your positioning in the bond market?
Overall, this reinforces our neutral stance on bonds, which we have maintained for several months now. In the US, the Federal Reserve is facing an unusual combination of factors. Economic growth remains relatively resilient, whilst inflation has recently moderated. However, geopolitical risks, and those linked to energy, make the inflation outlook uncertain. It is therefore difficult for the Fed to provide precise guidance on its future path, and the July decision to keep rates unchanged is part of a data-driven approach.
For our bond positioning, this means there is currently no strong case for taking significant directional positions on duration. We feel more comfortable at the short end of the yield curve, where the risk-return trade-off appears more balanced to us than at the long end. We expect US yields to remain broadly stable, or even trend slightly lower, over time, although volatility is likely to remain high in the short term. Within a multi-asset approach, we continue to favour the risk-return profile of global equity markets – particularly in the US – over that of investment-grade corporate bonds or government bonds.
You are underweight in Europe, which you describe as a ‘show-me story’. What would you like to see from the European equity markets to prompt a review of your positioning?
Europe presents a convincing macroeconomic outlook, but we now need to see this translate into earnings growth. However, certain factors are beginning to justify a little more optimism. Fiscal spending is rising, particularly in infrastructure and defence, whilst economic activity is showing signs – albeit still tentative – of stabilisation. But, ultimately, the equity markets need earnings growth. Compared with the US, Europe still suffers from weaker structural growth, lower productivity and significantly more limited exposure to the AI investment cycle.
To become more constructive on the region, we would like to see a sustained improvement in profit revisions, a rise in business investment and signs that fiscal stimulus measures are translating into accelerated private-sector growth. Europe is attractive, but for the time being, the US still offers a more favourable combination of growth, earnings momentum and structural investment opportunities, particularly in the area of AI.
What are your thoughts on the renewed interest in industrials, energy, financials and small- and mid-caps, which now seem poised to contribute to the rise in US equities?
This is one of the most encouraging developments in the US market and one of the main reasons why we remain overweight in global equities, particularly US equities. For a long time, the main criticism was that the rally relied almost entirely on a handful of tech giants. The situation is changing. Industrials, energy, financials and small- and mid-caps are now also contributing to the rally.
This shift partly reflects the resilience of the US economy, but also the emergence of a broader investment cycle centred on AI. Data centres require significant electricity generation capacity, electrical equipment, cooling systems, construction and physical infrastructure. This therefore affects not only technology companies, but also the real economy as a whole. AI is no longer just a technological story; it is also becoming a story of capital expansion spreading throughout the real economy. The broadening of market participation is making the US bull market healthier.
With the new financial year in full swing, between Jackson Hole, the Fed’s interest rate path and tensions around the Strait of Hormuz, where will your attention be focused most?
Three factors seem essential to us: inflation, earnings revisions and geopolitics. On the inflation front, we need to see whether the recent improvement in the US is sustainable. This will determine the Fed’s room for manoeuvre, particularly in the run-up to its next meeting in September. On the earnings front, I will be looking in particular to see whether the exceptional investment cycle in AI continues to feed through to the real economy and underpin broader growth in corporate earnings. Should this momentum be confirmed, it will reinforce our positive view on equities.
Geopolitics, of course, remains a major risk factor. The Strait of Hormuz represents an extreme risk in this regard, which we are monitoring closely, as energy is the main transmission channel. A further escalation of tensions, accompanied by a sharp rise in energy prices, could reignite inflation expectations and prompt central banks to tighten monetary policy once again. Our base case scenario remains favourable, however, with resilient US growth, solid corporate earnings and no major shock to interest rates. We therefore expect the Fed to maintain the status quo in September.