Optimistic, yes — euphoric, no: Don’t overlook the risks in the markets

• • Are markets chronically optimistic, realistic, or even blind to risk? There is no definitive answer to that question. “What is clear is that we are operating in an environment of significantly heightened uncertainty,” says Chief Investment Strategist Vincenzo Vedda.
  • “We believe the medium-term outlook for the  capital markets remains constructive. At the same time,  short-term risks of extreme market reactions should not be  underestimated.” One indication of this fragile, two-sided  environment: the dramatic price slumps in gold and silver at the  end of January. Another: the rapid surge of South Korea’s Kospi 
    index, which has soared an astonishing 130 percent since the 
    first tariff shock triggered by U.S.
  • President Trump on April 2,  2025. Almost anything seems possible — both on the upside and the downside. A dose of realism is warranted when 
    examining artificial intelligence (AI) and technology more broadly. They are no longer the sole catalysts driving equity  markets. “We see equity market gains now resting on a broader foundation,” Vedda notes.
  •  Even value stocks have delivered  substantial returns, at times outperforming the celebrated  “Magnificent Seven” U.S. tech giants. European banks, for  example, have posted gains of more than 400 percent over the past five years. Still, artificial intelligence remains perhaps the hottest theme, with enormous disruptive potential. But the label alone should not dictate investment choices. “
  • AI will continue to create compelling investment opportunities.  However, we believe it is wise to focus on those segments where  bottlenecks are likely to emerge,” Vedda explains. A bit of caution  is a good idea right now. “We maintain our view that a broadly  diversified portfolio — both geographically and across sectors — will likely serve investors best in a world where U.S. technology companies combine the strongest growth rates with the highest valuations.”

Topics driving capital markets 

Economy: Mixed signals from the U.S., brighter sentiment in Germany

•  The latest consumer confidence reading delivered an unwelcome surprise: U.S. consumer sentiment in January fell  to its lowest level in more than a decade. In contrast, the University of Michigan’s sentiment index painted a more 
  upbeat picture, climbing to its highest level in five months.
  — Germany, meanwhile, saw an improvement in business sentiment. The latest ifo Business Climate Index signaled a noticeable pickup in optimism within the industrial sector.

Inflation: Energy prices push up Germany’s inflation rate

•  In Germany, the inflation rate unexpectedly rose to 2.1% in January (December: 1.8%), defying market expectations.  Although energy prices were 1.7% lower year-on-year, they increased on a monthly basis — mainly due to the hike 
  in CO₂ prices from EUR 55 to EUR 65 per tonne. Food prices also ticked higher again.
  — In the eurozone, by contrast, inflation eased. Thanks to declining energy costs, the inflation rate fell to 1.7% in January (December: 2.0%).

Central banks: Fed pauses further rate cuts for now

•  The U.S. Federal Reserve left its benchmark interest rate unchanged at 3.5% to 3.75% during its January meeting,  following three consecutive rate cuts. Fed Chair Powell explained the decision by noting that inflation remains 
  somewhat elevated, while the unemployment rate appears to be stabilizing.
•  Given the moderate inflation rate in the eurozone, we do not expect the European Central Bank to cut interest rates  further this year.

Risks: Geopolitical uncertainty and political instability

•  In Europe, we see risks stemming from political instability, renewed trade tensions, and the potential impact of geopolitical uncertainties.
• High valuations and significant market concentration in artificial intelligence and technology stocks overall are making the U.S. equity market increasingly vulnerable to corrections.

• Gold and silver continue to rank among the top asset classes, even though prices temporarily dropped sharply at the end of January. Since the start of the year, gold is up 15 percent and silver even 23 percent. “The U.S. dollar and the Swiss franc — which are traditionally also viewed as safe havens — are not fulfilling that role at the moment. The same applies to government bonds,” says Vera Fehling, Chief Investment Officer for Western Europe. Yields on long-term government bonds have risen or, at best, stagnated — which means prices have generally declined. In fact, there are several reasons why markets might be expected to show a degree of nervousness: high equity valuations and extremely low credit spreads in corporate bonds.

• However, bond markets seem unperturbed. The MOVE volatility index for bond markets has been declining for quite some time. And in the corporate bond space, there is currently little to indicate that credit spreads are widening across the board.

  What does this mean for portfolio positioning? “We continue to rely on a  balanced mix,” says Fehling. For equities, the earnings season will be  decisive. As long as corporate earnings remain solid, this should support  stock prices. Corporate bonds also remain a meaningful diversification tool. And gold? “We believe the fundamental case for gold purchases remains intact, especially as major central banks still intend to increase their holdings,” Fehling explains. After the strong price increases of recent months, pullbacks — such as the one seen at the end of January — are not surprising and, in fact, a healthy development.

   

  Today’s gold rally is not unprecedented

  Major historical surges in the gold price, indexed to 100