Middle East Tensions Expected to Continue Amid Avoidance of Full-Scale Conflict

Market Update: Middle East Tensions and Global Economic Implications

Key Takeaways:

• The situation in the Middle East may not resolve quickly, with a high probability of prolonged heightened tension.
• Even in the absence of a full-scale war, extended uncertainty can have lingering economic and market implications.
• Markets have largely priced in the associated risks, with a relatively muted reaction seen so far.

Earnings and Consumption Trends:

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• Early signs of an earnings pickup are visible, particularly in sectors benefiting from GST rationalisation, such as auto and cement.
• Broader consumption trends are expected to strengthen over the next two quarters, potentially supporting a more broad-based earnings recovery across sectors.

Market Volatility:

• Markets have had sufficient time to assess and price in the associated risks, reflected in the relatively muted reaction seen so far.
• Investors are balancing geopolitical concerns with underlying economic fundamentals.
• A worst-case scenario could lead to another 5% correction from current levels, but the trajectory will depend largely on how events unfold.

Risk Management:

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• Investors should remain committed to their long-term asset allocation, ensuring it aligns with their goals of compounding wealth or protecting capital.
• Periods of correction may offer opportunities to gradually top up positions, provided they fit within the overall risk framework of the portfolio.

Sector Attractiveness:

• IT services stocks appear attractive from a valuation perspective following the correction.
• Established IT firms are likely to benefit from AI advancements rather than be displaced by them, indicating a complementary relationship.

Recommendations:

• Investors should remain cautious and avoid making strong sectoral preferences solely based on short-term geopolitical developments.
• A measured and disciplined approach is advisable during periods of heightened uncertainty.
• Within the equity allocation, investors should focus on opportunities that fit within the overall risk framework of the portfolio.