Taiwan GDP, need I say more?

But then one must layer on top of that the overwhelming evidence of the artificial intelligence build-out. Stock markets in Taiwan, Korea, Japan, and the US reached new highs this week. Manufacturers of semiconductors, electrical components and related products are leading returns across several markets. The simple, winning investment strategy has been “long AI, short macro”. It’s clearly not that simple, but spring is here, and optimism is in the air*

*with all the usual anxieties that things could go wrong.

• Key macro themes – Hope that the macro impact is limited if there is a Middle East peace deal
• Key market themes – AI or nothing

Deal or no deal?

The website hormuzstraitmonitor.com (the validity of which I cannot vouch for) claims to track the number of ships transiting the Strait of Hormuz – which on 7 May was just two in the past 24 hours, just 3.3% of the pre-war normal volume of ships. However, markets have displayed optimism over a potential deal between the US and Iran that would allow the return to safe passage for oil tankers and other shipping. There is still uncertainty over the terms and timing of any eventual agreement (there have been reports of exchanges of fire), but it does look like President Donald Trump would like a deal before he meets with Chinese President Xi Jinping in Beijing on 14-15 May. Global crude oil benchmark prices are well off their recent highs.

An escalation of the conflict remains possible but not as likely as seemed a few weeks ago. There is less talk of boots on the ground or taking control of Kharg Island. The US has backed off from offering protection for non-Iranian flagged vessels in the Gulf (‘Project Freedom’) and Secretary of State, Marco Rubio, suggested that Operation Epic Fury was over.

Investors’ response to deadlines amid the negotiations is that they don’t really mean anything - and with the US-China summit looming and the US mid-term elections coming increasingly into sight, there is every reason to expect a major de-escalation of tensions. The long normalisation of energy markets could then begin.

Forward thinking

Indeed, markets have been ahead of the politics. The MSCI World equity index bottomed on 30 March. Returns since then have been nothing short of spectacular, driven by two themes - the first being that the war would not last and therefore damage to the global economy would be contained. The second theme is the incredible wave of AI-related capital spending. Investors have gambled on the first with increasing confidence and do not want to miss out on the second.

The AI trade is often described as concentrated. That may be the case - it is one overriding theme. However, it is the theme on which the global economy is aligning for the next several decades. Looked at another way it is broad-based. In the last week several indices have been driven to new highs by technology companies’ performance – the S&P 500, Nasdaq, Korea’s KOSPI index, Taiwan’s main index and Japan’s Nikkei 225 amongst them.

The best performing stocks across a host of markets are semiconductor and associated product manufacturers, suppliers of electrical equipment, circuit boards, and communications equipment. There is an element of repetition in these comments but the scale of what is happening is incredible. In the first quarter US GDP report, fixed investment spending on “intellectual property equipment” was up 24.3% compared to a year earlier (coming after equally strong growth in the previous four quarters). Excluding that item, GDP growth would have been 1.4% year-on-year compared to 2.7%.

And just to throw in another spectacular number, Taiwan’s Q1 GDP growth rate was 13.7%. There seems little reason to bet against the AI trade in its different forms. Asian equities and technology-themed equity strategies look likely to remain the highest beta ways of benefitting from the theme.

Higher yield environment

The macro situation is more nuanced. Interest rate expectations have not changed much with markets still pricing in higher policy rates in the Eurozone and in the UK. Inflation is higher and will be higher for some months, compared to the expected trajectory before the war. Growth is softer. The latest round of purchasing manager surveys from the US and Europe indicate higher readings for prices and softer readings for new orders and employment. Borrowing costs are certainly higher for businesses and consumers.

In fixed income markets, yields are higher. It remains the case that short-duration, inflation-linked, and higher yielding credit assets are the best performers. Longer duration bonds are subject to repricing on any persistence of inflation and any deterioration in fiscal balances due to slower growth. But credit has been, mostly, rock solid with most corporate bond indices outperforming their government bond or swap equivalent benchmarks during April. Lower credit spreads, again, is the outcome. It would need a very bullish pivot (lower) on growth and interest rate expectations to boost the returns from long-duration government bonds. 

The next test

The macro backdrop is fragile, with major economies’ growth not so strong, but investor sentiment is improving. We must remain sensitive to worst-case-outcomes – more expected disruption to energy flows, higher prices, non-linear macro effects if supply is significantly impacted. Stagflation, as a narrative, sits alongside debt unsustainability, excessive equity valuations, and the demise of fiat currencies as cataclysmic “might happen” outcomes. Betting on them, though, has huge opportunity costs when our lives are still framed by relative economic stability and technological advances.

The next test to sentiment might be the US-China summit with the focus on sensitive trade in semiconductors and rare earths. A friendly, co-operative outcome would be another feel-good factor for investors. But that is a nuanced relationship, especially as US allies have been cosying up to China in recent months in response to a less friendly relationship with America. My guess would be that the summit will allow President Trump to claim some kind of victory, or a deal with China. Then the world’s focus can turn to the football World Cup, being partly hosted in American cities – an opportunity for some much-needed global goodwill to be reclaimed by Washington.

Performance data/data sources: LSEG Workspace DataStream, ICE Data Services, Bloomberg, BNP Paribas AM, as of 7 May 2026, unless otherwise stated). Past performance should not be seen as a guide to future returns.