May 2026*
While the Iran conflict and disruption to the Strait of Hormuz have increased geopolitical risks, global activity and earnings data remain broadly constructive. We expect a resumption of USD depreciation to support international equity outperformance. We continue to favour exposure to AI-linked markets, particularly EM, Japan, and the Netherlands. This quarter, we upgraded Canada to neutral to reflect a more constructive commodities outlook and downgraded Switzerland to
underweight.
In our last Developed Market Quarterly update, we highlighted evidence of a global cyclical upturn and a strong setup for international equities (ACWI ex-US) in 2026. The conflict in Iran has partially muddied that narrative, and there are clear risks to the cycle from oil and supply-chain disruptions. However, despite these geopolitical developments, our outlook remains broadly on track. Non-US equities are outperforming the US year-to-date following some partial retracement (see Chart 1). We attribute this trend to expectations for further USD weakness, alongside resilient global growth and corporate earnings.
The dollar is typically referred to as a “safe haven” currency and modestly appreciated in March as geopolitical tensions rose. This strength has since reversed as negotiations continue, and the dollar (USTWBGD Index) is down 1.1% year-to-date. Beyond the short-term volatility, we continue to see downside pressure for the greenback over the course of the year, driven by the valuation, structural, and cyclical factors we have outlined previously.
In particular, the real broad effective exchange rate (REER) remains around 12% above its long-term average, while US real rate differentials have declined relative to the rest of the world over the past year, implying a weaker USD trend (see Chart 2). Over the longer term, we believe the US will remain the world’s reserve currency. However, continued diversification into non-USD assets should exert downward pressure on the dollar and support non-US markets.
Despite the ongoing closure of the Strait of Hormuz and elevated energy prices, global growth appears resilient. The global composite PMI remains above trend, while global earnings growth continues to be positive. Similar to the Liberation Day shock in April 2025, calls for an imminent recession once again appear premature.
We believe the “K-shaped” economy is continuing to support growth. While some sectors and countries are already being negatively impacted by higher energy prices, the AI capex buildout continues to progress, supporting areas linked to the AI supply chain. Chart 3 highlights Taiwan export orders year-on-year relative to ACWI trailing earnings. The data include March—the peak of the Middle East conflict—and technology exports accelerated during the period. Korean export data provide a similar signal, while rising capex guidance from US hyperscalers suggests these trends may persist for some time.
While the tech hardware sector appears less sensitive to higher energy costs, it is also important to note that the broader global economy consumes significantly less oil per unit of GDP than in previous decades (see Chart 4). We expect supply disruptions to weigh on growth and add to inflation; however, materially higher energy prices may be required to derail the cycle.
| Chg | -2 | -1 | 0 | +1 | +2 | |
|---|---|---|---|---|---|---|
| US | – | |||||
| Canada | ↑ | |||||
| Eurozone* | – | |||||
| Switzerland | ↓ | |||||
| UK | – | |||||
| Japan | – | |||||
| Australia | – | |||||
| EM | – |
*Eurozone is overweight via the Netherlands, the other countries are neutral.
Note: Up/down arrows indicate a positive/negative change in our asset allocation compared to the previous quarter. A dash indicates no change.
Source: CLIM
| Chg | -2 | -1 | 0 | +1 | +2 | |
|---|---|---|---|---|---|---|
| Canada | ↑ | |||||
| Eurozone* | – | |||||
| Switzerland | ↓ | |||||
| UK | – | |||||
| Japan | – | |||||
| Australia | – | |||||
| EM | – |
*Eurozone is overweight via the Netherlands, the other countries are neutral.
Note: Up/down arrows indicate a positive/negative change in our asset allocation compared to the previous quarter. A dash indicates no change.
Source: CLIM
*This publication reflects asset performance up to 30 April 2026, and macro events and data releases up to 8 May 2026, unless indicated otherwise.
The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.