<p>The situation in Iran remains unresolved, with significant differences in demands from various parties. Market concerns about rising uncertainty continue to persist, and the risk of further escalation of conflict has not been eliminated. Thomas Poullaouec, International Head of Investment Solutions and Fund Manager at Prudential, stated that energy-importing countries remain the most vulnerable, but even though the United States has achieved energy self-sufficiency, it is still difficult to avoid impact. Rising global energy prices will still permeate domestic costs, covering fuel, transportation, and broader economic aspects.</p>
<h2>Even if the conflict eases, long-term impacts are emerging</h2>
<p>He also pointed out that even if the conflict ultimately eases, the energy shock may be temporary, but long-term impacts are emerging. For example, the latest U.S. defense budget proposal for 2027 includes a nearly 50% year-on-year increase, a significant portion of which is allocated to addressing the situation in Iran.</p>
<p>Additionally, the recently passed &#34;Inflation Reduction Act&#34; in the U.S. has increased fiscal spending, expected to add nearly $4 trillion in debt, raising market concerns about the U.S. fiscal and inflation outlook. Amid ongoing geopolitical conflicts, the dual pressure of limited energy supply and rising debt levels is once again pushing inflation risk to the forefront of market focus, prompting renewed attention to inflation hedging strategies.</p>
<h2>Earnings season focus may shift to corporate outlook</h2>
<p>It is noteworthy that, amid rising geopolitical risks in the Middle East, most global stock markets still exhibit a degree of resilience. Some market perspectives suggest that the market reflects an optimistic expectation that the conflict may only be short-term. However, as the conflict continues and risks escalate, this expectation is becoming increasingly uncertain.</p>
<p>In contrast, corporate earnings remain stable. Over the past few years, even with recurring geopolitical risks, earnings performance has remained resilient. This year's earnings expectations have accelerated on a strong foundation, benefiting from fiscal spending, capital expenditures, tax incentives, and expanded opportunities related to artificial intelligence.</p>
<p>As earnings season approaches, market focus will shift to whether companies begin to reflect the impact of the aforementioned risks on their outlook. However, at this stage, earnings momentum continues to support the market and helps extend the trend of market expansion from a few leading stocks to broader sectors, provided that the geopolitical situation does not deteriorate significantly.</p>
<h2>Downgrade U.S. small-cap allocation to neutral</h2>
<p>In terms of asset allocation views, given that the situation in the Middle East is raising inflation risks and may drag down economic growth, the firm has downgraded its equity allocation from an overweight position to a neutral position. In the U.S. market, considering that the pace of policy easing may be delayed, the allocation to U.S. small-cap stocks has been downgraded to neutral levels.</p>
<p>For European, Japanese, and Asian (excluding Japan) markets, due to higher reliance on Middle Eastern energy and greater susceptibility to energy shocks, allocations have also been downgraded to neutral levels. In contrast, the firm has slightly increased its allocation to Chinese stocks to an overweight position, believing that their correlation with global markets is lower. At the same time, it has increased the allocation to stocks related to physical assets to an overweight position as an inflation hedge.</p>
<h2>Cash allocation raised to slightly overweight</h2>
<p>In fixed income, the allocation remains underweight, but there has been a moderate reduction in preference for short-duration securities. Amid rising short-term uncertainty, the firm has slightly reduced its underweight allocation to U.S. long-term Treasuries and increased its overweight allocation to Treasury Inflation-Protected Securities (TIPS swaps) to manage inflation risk. Additionally, the firm has raised its cash allocation to a slightly overweight level to maintain flexibility and liquidity to seize opportunities arising from potential market mismatches</p>

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<p>The situation in Iran remains unresolved, and market concerns about uncertainty are intensifying. Thomas Poullaouec from Prudential stated that even if the United States achieves energy self-sufficiency, it will still be difficult to avoid the impact of rising global energy prices, which may drive up domestic costs. The U.S. defense budget has significantly increased, fiscal spending is rising, and debt levels are climbing, making inflation risk once again a focal point for the market. Despite escalating geopolitical risks, corporate earnings remain stable, and market attention will shift towards corporate prospects. Prudential has downgraded its allocation to U.S. small-cap stocks to neutral</p>

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The situation in Iran remains unresolved, and Prudential expects the United States will inevitably be affected, reducing stock allocations and being more optimistic about the Chinese stock market