Looking at the coming months, the baseline scenario is that of a “fragile truce”: the de-escalation has supported a strong rebound in risky assets but, even in the absence of a resumption of clashes, we are facing a prolonged closure of the Strait of Hormuz. The latter limits the global supply of energy goods, supporting oil prices, which remain above $100 per barrel compared to $60 at the beginning of the year.
INFLATION FEARS GROW
At the same time, the closure of the Strait endangers the circulation of essential goods for the food supply chain: the restriction in fertilizer supply can have very serious global repercussions on food production, in an already complex context given the drought risk arising from the so-called Super El Niño.
The rise in global energy and food prices is already impacting consumer prices and household purchasing power. While consumption may initially remain supported thanks to a reduction in savings rates, a prolonged crisis would lead to a more marked slowdown in domestic demand, with a non-negligible risk of recession in regions and countries most sensitive to energy imports, primarily Europe and Italy.
UPDATE ON EUROPEAN AND AMERICAN RATES
On the rates front, the risk of a stagflation scenario can have a significant impact on monetary policies. The market already prices in almost three rate hikes for the ECB from now until the end of the year, which if implemented would have a negative impact on growth in the short and medium term. For now, the ECB, although aware of inflationary risks, has remained steady, but a less accommodative tone in recent statements cannot be hidden.
The ten-year Bund yield is trading just above 3%, a historically very high level, given the upward repricing of inflation expectations. However, higher levels cannot be excluded in case of a worsening energy crisis.
That said, current levels suggest at least a negative/constructive approach, with active management to handle fluctuations around these levels.
Regarding the United States, the market has fully removed previous expectations of rate cuts for 2026. Overall inflation has already broken through 3% year-on-year, but for the moment, core inflation shows a downward trend, albeit slow.
This should limit further upward pressure on market rates, with the ten-year Treasury yield already trading around 4.40% and the 30Y above 5%. In this context, we look with interest at UK bonds, with the ten-year Gilt yield already above 5%, with historically wide spreads compared to Bunds and US Treasuries.
PORTFOLIO ALLOCATION
In terms of investment, the recent rally suggests caution in trying to anticipate a further sharp rise in equity markets. On one hand, the good performance of corporate earnings (especially in the US and the technology sector) cannot be denied; on the other hand, markets seem not to see the downside risks to growth arising from an inflationary spiral.
A generally very selective approach appears preferable for now.
Looking at the various market segments, a key point is understanding whether the technology sector is facing a bubble. As mentioned, the good performance of corporate earnings and record-high margins seem to contradict this hypothesis, thus suggesting a positive stance on the sector. Obviously, phases of volatility cannot be excluded (such as those recorded in the first part of the year), especially for those stocks with extremely high valuations and difficulties in financing necessary investments with their own means to remain competitive in the race for Artificial Intelligence.
Alongside the technology sector, we confirm strategically important sectors for the domestic economy, such as the banking and defense sectors in Europe, as well as gold stocks (despite the volatility of recent weeks) and utilities.
On the rates side, as mentioned, we adopt a neutral approach on duration, but with active management to handle volatility around the current rate levels, which are historically high.
Regarding BTPs, it should be noted that Italy is more sensitive to energy shocks. Consequently, in the current context it is difficult to see the spread lows seen in the first part of the year again in the short term. Similarly, good public finance management in recent years reduces the risks of a significant widening of spreads.
In the government sector, we favor UK Gilts, as well as local currency government bonds from emerging countries offering high real rates (such as Brazil, Colombia, Mexico, and Hungary), which therefore remain an interesting area of diversification for us, considering the very high real rates offered by the region.
CONCLUSION
The framework in which we operate is very complex and very open. Structurally, the world is moving towards disinflation (AI, ample productive capacity, China, potential abundance of energy), but geopolitical developments (war, rate cuts, tariffs, the need to grow at all costs to capture consensus) and cyclical factors (El Niño) can push in the opposite direction, i.e., stagflation.
This situation should advise savers to remain flexible to various different scenarios, to avoid being too exposed to the long-term interest rate world, and to maintain diversification by geography and sector in the equity market.
