Navigating growth divergence and AI tensions

By Raj Singh
Portfolio Manager, Multi-Asset

Markets remain unsettled as long-delayed economic data trickles in after the U.S. government shutdown, leaving investors navigating a persistent “data fog.” Backward-looking indicators dominate, but the real question is forward GDP momentum. Recent volatility reflects uncertainty: the economy shows resilience, yet cracks are emerging as lower- and middle-income households face tighter credit and rising costs, even as wealthier consumers stay buoyant. This divergence matters—consumer spending drives growth.

The Fed is effectively “driving in the fog.” While soft labor conditions and subdued sentiment raise concerns, they are not recessionary, giving policymakers room to wait for clearer signals. If the labor market weakens sharply, rate cuts could come sooner to sustain expansion. Looking ahead, we expect expansive fiscal policy and gradual monetary easing to create a supportive backdrop for risk assets. Despite political noise around tariffs, fundamentals point to a pro-growth environment favoring equities and credit.

Equity markets reflect tension. Tech giants’ success is fueling speculation about an AI bubble. Valuations remain below dot-com extremes, supported by solid earnings, strong revenue prospects, and healthy balance sheets. Still, with AI-related capital expenditure at eye-popping levels, skepticism about returns is healthy—especially given the difficulty of quantifying productivity gains. One warning sign to watch: rising debt-funded AI capex. If this accelerates relative to market cap, it could signal bubble territory. A sharp correction in AI-linked assets could spill over into consumer spending and broader growth.

We continue to see compelling opportunities in U.S. equities—especially in Large Cap Tech which will continue to benefit from the combination of solid fundamentals and structural AI theme, and US Healthcare on historically cheap relative valuations and defensive characteristics providing safety to navigate any pickup in volatility.

In Asia, Taiwan equities stand out as major beneficiaries of the surge in AI-related capital expenditure, while China is making significant strides in AI development and remains a potential co-leader with US in AI. In China, policy support aimed at pivoting the economy away from deflation and toward consumption should continue, and we prefer a barbell approach combining China Tech with high-dividend strategies. The Chinese market also looks set to benefit from the potential migration of more than US$20 trillion in household deposits toward capital markets. India, despite headwinds from U.S. immigration and trade policies that led to underperformance in 2025, retains a strong domestic growth story. Structural reforms and constructive signals on trade talks between the US and India reinforce its long-term appeal, while its low correlation with other markets provides valuable diversification for global portfolios.

We remain constructive on credit supported by solid growth and accommodative policy. However, we prefer credit at shorter maturities while active issuer selection and disciplined risk management are increasingly critical in navigating today’s complexities.

For downside protection, we favor long-dated U.S. Treasuries, which historically perform well during volatility. Despite concerns that past policies dented confidence in the dollar, foreign demand for Treasuries remains strong, and recent dollar weakness appears to be an orderly repricing rather than a crisis. Gold returns may moderate as central bank buying stabilizes.

Overall, investors should stay nimble. In an environment where information is scarce and crosscurrents risk turning into rip tides, flexibility matters more than bold conviction. Position for long term tech innovation, diversify growth risks, and keep an eye on liquidity. The winners will be those who adapt quickly without overreacting to noise.