Navigating the new market reality of volatility and divergence

THE global financial landscape has entered a period of pronounced turbulence.

As at late March, US equities have endured their longest losing streak since 2022, with the S&P 500 declining 8.2 per cent over eight weeks and the VIX volatility index surging to its highest level in nearly a year, although market fears have eased significantly in April.

The immediate catalyst – the escalating conflict in the Middle East – has been compounded by mounting anxieties over the health of the world’s largest economy.

For investors and wealth managers alike, the current environment demands not only vigilance but also a strategic recalibration.

Geopolitics and the shadow of stagflation

The most visible force unsettling markets is the ongoing war involving Iran, which erupted in late February and is showing little sign of resolution, despite occasional news of ceasefires.

The conflict’s economic reverberations are palpable: Oil prices have soared above US$100 a barrel, with WTI crude up over 50 per cent and Brent crude peaking at US$118.35.

Yet, to attribute the recent sell-off solely to geopolitical risk would be an oversimplification. Underlying economic fundamentals are also deteriorating.

We have revised downward our gross domestic product forecasts for the US; inflation expectations are rising and consumer confidence has slipped to a three-month low.

Bond yields have climbed sharply, reflecting fears that persistently high oil prices could stifle growth and reignite inflation – a toxic combination that raises the spectre of stagflation.

The imperative of diversification

Against this backdrop, the question for investors is not whether to act, but how. The answer lies in disciplined diversification, sector rotation and a renewed focus on quality.

Despite near-term headwinds, the US stock market retains its medium to long-term appeal.

Its structural advantages – deep capital markets, a culture of innovation and a diversified industrial base – remain intact. However, the path forward will be uneven. Sectors that thrive in inflationary environments, such as energy and materials, warrant increased attention.

Equally important is an emphasis on companies with robust balance sheets, strong pricing power and stable cash flows.

Fixed income strategies must also adapt. Short-term or floating-rate bonds can help manage interest rate risk, while higher credit quality is essential as borrowing costs rise.

Inflation-hedging assets – commodities and real estate, in particular – should play a more prominent role in portfolios.

Above all, maintaining ample liquidity and regularly reassessing risk tolerance are prudent steps in a world where shocks can occur suddenly with little warning.

China’s recovery: two different speeds

While US markets wrestle with stagflation fears, China presents a different but equally complex picture. Its targeted stimulus has supported infrastructure, manufacturing and some consumer sectors, particularly export-oriented and advanced industries.

However, domestic demand remains subdued. The property sector is still under pressure and the recent rebound in equities appears to be driven more by policy announcements than a fundamental turnaround.

For investors, this means they have to adopt a more selective approach. Sectors benefiting from policy support, such as green energy, advanced manufacturing and technology, offer relative promise. Conversely, caution is advised in real estate and non-essential consumption.

Diversification across regions and asset classes can help mitigate country-specific risks, while close monitoring of economic data and policy developments is essential to gauge the sustainability of the recovery.

Singapore a beacon of stability

In contrast to the volatility elsewhere, Singapore’s Straits Times Index (STI) has demonstrated notable resilience.

The STI’s defensive sector composition – anchored by banking, real estate and consumer staples – has provided a buffer against global shocks.

Major Singaporean banks, in particular, have benefited from expectations of rising rates, supporting the thesis of profitability and net interest margins.

Singapore’s safe-haven status has attracted capital inflows during periods of turmoil, while the index’s attractive valuations and stable dividends continue to appeal to yield-oriented investors.

However, risks remain.

The STI is not immune to global economic trends and rising rates could pressure real estate investment trusts (Reits), a significant component of the index. In the short term, its resilience may persist, but external risks could limit upside potential.

Over the long term, Singapore’s stable regulatory environment and robust financial sector underpin the STI’s continued attractiveness.

Stable indices, structural shifts

One of the most striking features of today’s markets is the widening divergence between sectors. While headline indices may appear stable, performance disparities beneath the surface are growing.

Defensive sectors such as banking and consumer staples, as well as conflict beneficiaries such as energy, aerospace and defence, are outperforming.

Meanwhile, rate-sensitive and cyclical sectors such as Reits and industrials are lagging.

This pattern is likely to persist. Rising rates benefit banks but pose challenges for leveraged sectors. Commodity price volatility introduces further dispersion, particularly for sectors exposed to energy costs. Geopolitical risk continues to drive capital into defensive havens.

In this environment, investors should overweight resilient sectors and companies with strong balance sheets and pricing power. Selective allocation to Reits – favouring those with low leverage and exposure to resilient real estate segments, such as logistics and data centres – can also add value.

Geographic and asset class diversification remain essential, as does a focus on high-quality, dividend-paying stocks.