Market divergence and portfolio strategy amid geopolitical risks (with Francine Lacqua)

Bond markets signal one thing, equity markets another. Who is right?

Francine Lacqua

John O'Toole

Equity markets discount positive elements: real economic strength with 16% US earnings growth. Bond markets reflect the shift from rate easing to potential rate hikes as inflation persists above targets.

Equity market resilience does reflect real economic strength and power and earnings power. They are very strong, 16% in the US.

With inflation rising and rate hikes possible, can equities keep hitting records or will there be a correction?

Francine Lacqua

John O'Toole

The tech innovation history is positive. Massive CapEx investment is real economic activity. IPO sentiment and excitement will add to market froth. Divergence creates opportunities for robust portfolios.

We're going through a moment of transition. This was not a story two years ago, 18 months ago even, the massive CapEx bend that we've seen.

Strait of Hormuz closed but equity markets unaffected. How does energy shock pass through without geopolitical solution?

Francine Lacqua

John O'Toole

Solutions are hard to come by. We're surprised oil prices haven't increased more. Refined products (gas, heating oil) have risen a lot compared to Brent. Duration of the situation is key.

If you had been given foresight six months ago of all that has happened, we would probably be surprised to see levels where they are, particularly in equity markets.

Where does inflation end up?

Francine Lacqua

John O'Toole

Inflation expectations 5-10 years out are still moderate (~1.5% in US), not far from where they've been. Likely higher but central banks are ready to react. Rate hikes are still limited in scope.

Are they going to run away? We have central banks ready in waiting to react.

Where do you see market dislocations and opportunities? Gold, Japan?

Francine Lacqua

John O'Toole

Opportunities in high-yield commodity currencies like Australian dollar (7% YTD) as proxy for commodity markets. Gold exposure continues with target $5500 for 2027, consensus around $6000. Gold was one of best performing asset classes last year.

We're all about diversifying away from the super concentrated things in Mag Seven. We've diversified to Europe, Japan. Japan is massively undervalued trading at 10 times earnings, US at 21 times. Europe is still relatively cheap.

Europe is cheap for good reason - exposure to Ukraine, energy prices.

Francine Lacqua

John O'Toole

European real economy faces serious headwinds from energy situation. Growth has been anemic (Italy, France ~1%). German infrastructure project and debt break release are structural long-term boons. Europe will benefit from AI productivity gains.

SoftBank's investment in France shows big investments will come to Europe. The strategic autonomy topic in defense and technology is a strong debate.

Country by country or sector by sector in Europe?

Francine Lacqua

John O'Toole

Top-down country approach but yield curve shape has sector implications. Flattening yield curves (short-term rates backing up, long-term anchored) can improve growth tech stocks and defense stock positioning.

SignalTube