In the changing Middle East landscape, are gold, U.S. bonds, and emerging market investments no longer attractive? A senior executive at Swiss Pictet Wealth Management says so.

At the start of the year, major institutions had at one point expected that global multi-asset would deliver strong performance this year. But then, the rise of AI-driven disruptive trading, the situation in the private credit market—previously plagued by blowups—had not improved, and new geopolitical conflicts have once again emerged, fundamentally changing the global market environment.

Recently, at the Swiss investment management firm of Pictet Asset Management, the Chief Investment Officer’s Office and macro research head Alexandre Tavazzi shared insights with Yicai Finance on market investment logic amid geopolitical tensions and market hotspots such as the performance of US Treasury yields, US stocks, and the US dollar.

Pictet Asset Management Chief Investment Officer’s Office and Macro Research Head Alexandre Tavazzi (interviewee)

Emerging market assets are more appealing

Since last year, many analysts have advised global investors to diversify from dollar-denominated assets into non-dollar assets. But after the conflict in the Middle East, the US dollar seems to have regained its status as one of the major safe-haven assets.

When asked whether this conflict will make US assets attractive again, Tavazzi said that clarifying this is crucial to any asset allocation strategy, especially for international investors. “I believe we must consider currency and assets separately. The US dollar has indeed strengthened, and since the outbreak of the conflict, it has been one of the safe-haven currencies. The same is true for the Swiss franc.” He analyzed, “However, if you look at the underlying assets priced in dollars—for example, the S&P 500 index and the US Treasury market—you find that the market does not view dollar assets as having safe-haven characteristics. Their performance is almost the same as assets in other regions. US stocks and US Treasuries have both fallen for a period of time.”

In addition to the Middle East conflict, factors affecting the recent direction of dollar assets also include market concerns about artificial intelligence (AI), as well as the resulting issues with corporate earnings potential. More importantly, in such an environment, US Treasuries have not provided effective protection the way they used to.

Short-term US Treasuries—meaning two-year and shorter maturities—were once the best safe-haven assets in a geopolitical conflict environment like this. But now, the situation is completely different. The monetary environment has tightened significantly, and the yield on the two-year US Treasury has jumped by nearly 40 basis points. “So, the recent trend in the dollar is more a monetary issue and does not involve the investment value of dollar assets. In this Middle East conflict, dollar assets have not shown strong resilience to risk,” he said.

At the end of last year and the beginning of this year, investment in non-dollar assets represented by emerging market assets had been one of Wall Street’s hottest trades for a time. But after this Middle East conflict, emerging market stocks, bonds, and FX all fell across the board. Doubts about whether emerging market assets are still worth viewing long term have gradually grown louder in the market.

Tavazzi said that at the beginning of the year, emerging markets showed potential—whether in stocks, bonds, or foreign exchange. “At the same time, we also need to understand that emerging markets are not a homogeneous category. Asia is an important component of the MSCI Emerging Markets Index, and there is also Latin America.” In terms of the impact of the conflict, he believes the first factor is that the dollar strengthens, so emerging market currencies depreciate. Emerging market stocks were also hit by currency depreciation. Second, the market had previously broadly expected that central banks in emerging market countries would cut rates because inflation in these countries had declined. But due to the effect of oil prices on inflation after the conflict, rate cuts were put on hold for the time being, which also affected emerging market assets.

But in the long run, Tavazzi said, “We expect that the situation in the Middle East will improve at some point. Therefore, emerging market assets still have some very interesting characteristics. The central banks in emerging market economies may restart a cycle of rate cuts. At the same time, when you look at the emerging market bond market—especially the investment-grade bond market—you will find that companies in these economies usually have lower leverage than in the United States, and their spreads are also more favorable than those in the United States. That’s why these investment-grade bonds are quite attractive as well. Additionally, when assessing from the perspective of tangible assets that may become more favored—for example, key minerals and metals—many emerging market countries are production countries for these specific minerals and metals. So at some point in the future, investing in emerging markets will become attractive again. Over the long term, emerging market assets still have a certain level of appeal.”

Regarding the outlook for Chinese assets, he emphasized two points. First, China has shown extremely strong resilience, which is definitely worth paying attention to. Second, it is necessary to distinguish which parts of China’s market are growing—for instance, impressive changes are taking place in areas such as technology, renewable energy, and AI. Chinese AI companies are also being asked to open their models so they can be rapidly applied in the industrial sector. That is the truly shining area—an area with sustained growth that is worth focusing on.

Outlook for AI investing and trading

Even before geopolitical conflicts, due to market concerns about disruptive changes brought by AI, including in software, professional services, media, and finance, those sectors were affected. Some industry stocks suffered sharp declines, dragging down the overall performance of US stocks. Some analysts believe that if investors still want to participate in AI trading, they should shift capital from AI enablers to AI beneficiaries.

Tavazzi said, “Yes, the software industry is being disrupted, but not all software companies will be disrupted. For those large, established software companies we use in everyday life, the risk is not that high because the services they provide are difficult to replace. But some software applications now do have the possibility of being replaced by AI-driven automated programming. Certain companies—especially those that cannot provide any incremental value—will face survival challenges. It’s also worth noting that in the private credit space, software companies’ loans account for about 20% of total lending. So, this AI disruptive theme will also affect private credit.”

When it comes to how to conduct AI trading and investing, he agreed with the logic widely discussed in the market—“moving from investing in AI enablers to investing in AI beneficiaries.”

“Today, the scale of investment in the AI sector is huge. The total capital expenditure plans of major companies over the next 12 months exceed $600 billion, and most of that is going into ‘hard’ areas, such as semiconductors and data centers. Data centers require a large amount of energy to operate. Therefore, any technology that can meet the energy and operational needs of data centers is worth investing in. For example, cable companies and power companies are, so to speak, AI trading beneficiaries. 3D printing is similar,” he said. “AI technology will indeed benefit many companies through real-world applications, but direct beneficiaries may not be those companies that are themselves in the AI business. Instead, it may be companies that produce heavy machinery—for example, cables, power generation, semiconductors, and so on. More broadly, businesses across industries are expected to benefit from AI because AI can help companies improve productivity.”

In addition, he emphasized that tech companies—especially AI companies—have been the main driving force of the US stock market in recent years. Now that disruptive AI technology is becoming increasingly mainstream, US stocks are gradually entering a phase of sector rotation, and the number of rising stocks is also expanding.

“This has already happened. If you look back at the past three years (as of 2025), fewer than 35% of the companies in the S&P 500 have performed better than the index. In other words, the market’s rally is highly concentrated in a small number of companies, which typically benefit when interest rates fluctuate. But if you look at performance so far this year, it is exactly the opposite. Although the S&P 500 has been slightly down from the start of the year, more than 60% of the S&P 500 constituents have outperformed the index itself. The rise in US stocks is expanding into other areas,” he said.

Furthermore, the world today is shifting from a world dominated by intangible assets (where trading in the AI market mainly involves software companies and mega-scale data center operators) to one in which tangible assets are becoming increasingly important for both companies and countries.

Old investment beliefs are being challenged

After this Middle East conflict, consumer staples or healthcare sectors did not rise as they typically would during geopolitical conflicts in the past; instead, they fell as well, shaking long-standing investment beliefs. In response, Tavazzi said that when the market began indiscriminate selling due to the Middle East conflict, investors also started selling stocks that were still profitable. As a result, not only the assets that fell sharply were sold off—stocks that had been performing well before the outbreak of the conflict were also sold.

Investors have become more focused on the liquidity of assets. Gold was also sold off. In terms of currencies, only the Swiss franc and the US dollar performed well, and US Treasuries also failed to provide the effective protection they had in past geopolitical conflicts. Investors realized that the only option was to increase cash reserves.

US Treasuries are also not in line with old investment beliefs. US Treasuries have always been a safe-haven asset, and their performance was also very strong at one point in February. However, after the Middle East conflict, the price of US Treasuries fell and yields rose again.

Regarding this, Tavazzi said that the response of the US Treasury market is influenced, on the one hand, by the inflation impact from rising oil prices, and on the other hand, by the drag from the US fiscal situation. Whether past investment experience still works depends on whether this time is different. “Our view is that this Middle East conflict is fundamentally different from historical geopolitical conflicts,” he said. He believes that the direct impact of the conflict could be an increase in inflation. Earlier, the yield on the 10-year US Treasury had eased slightly below 4%. But now, because of the inflation impact from oil prices, the market is re-pricing. Second, the market previously expected the Federal Reserve to cut rates twice in 2026, but those expectations have since been significantly scaled back.

In the long run, the fiscal impact also needs to be considered. Before the outbreak of the conflict, the US fiscal deficit already made the market worried, and the conflict would bring even higher fiscal costs. The US Department of Defense is requesting an additional $50 billion in funding from Congress to support the high cost of war. At the same time, it is also necessary to be alert to the US Supreme Court’s ruling on Trump’s tariffs, which could lead to a slight decline in the level of tariffs. The Trump administration’s “One Big Beautiful Bill” could have offset the negative impact on the fiscal deficit by generating substantial revenue through tariffs. But if there is any change in tariff policy—for example, if the Supreme Court rules that the current method of implementing tariffs is unlawful—then US fiscal pressure would be greater.

Regarding other fixed-income investments, he emphasized that “in the current environment, the advantages of a shorter duration are fairly clear. The initial consequence of the conflict is inflation, but it could subsequently lead to a significant slowdown in the economy. Because rising oil prices are a supply shock, they will limit people’s disposable income and ultimately lead to slower consumption. Therefore, if this situation continues, it will eventually create negative economic consequences, although we do not know how long it will last.”

In addition, Tavazzi is also concerned about conditions in the US private credit market. Many private credit funds have already stopped operating because many investors want to withdraw their capital. And these private credit funds and leveraged loan funds are important sources of financing for US small and medium-sized enterprises. “If we combine reduced energy supply with potential financing issues in private credit, the outcome could be that if this situation persists for a substantial period of time, it could have a major impact on US economic growth. This might even force the Federal Reserve to reconsider whether to raise interest rates. Therefore, maintaining short bond maturities—such as within two years—can allow investors to benefit from policy adjustments the Federal Reserve may make over the coming months,” he said.

But he believes the likelihood that worsening private credit leads to systemic risk is small. “In terms of the scale of operations and the size of balance sheets of US banks and large financial institutions, their risk exposure to the private credit sector is not large. Therefore, the worsening of private credit has not yet created systemic risk for US financial institutions and banks.” By contrast, he is more concerned about the credit supply to small and medium-sized enterprises. After the new rules implemented following the 2008 financial crisis, small and medium-sized enterprises were basically excluded from bank lending in the US. Therefore, the financing sources for small and medium-sized enterprises are either the credit market, or leveraged loans or private funds.

Duty editor: Su Xiao