• Declining Global Liquidity Signals ‘Risk Off’ Shift: The Global Liquidity Index (GLI ) has peaked and entered a downswing, pushing market conditions towards a ‘Risk Off’ environment. This systemic downturn, rather than the oil spike alone, is the primary force eroding portfolio performance and explains growing stresses in private credit, as exemplified by troubles at firms like Blue Owl.
• Oil Shock Exacerbates Existing Trend: While the Iran conflict-driven oil price spike acts as a negative Black Swan shock, its impact is compounded by the already weakening liquidity cycle. Higher oil prices further drain global liquidity, with each US$10/bbl rise reducing the GLI by
approximately 1.5 points.
• Divergent Central Bank Policies Create Opportunities: The Fed is managing liquidity to avoid market crashes, while the PBoC is aggressively injecting liquidity to support China’s economy. This divergence justifies holding gold and explains why Chinese markets are at an earlier, more favorable stage of the investment cycle compared to the US.
• Defensive Portfolio Rotation is Warranted: With the liquidity downturn expected to last 12-15 months, the recommended strategy is to pare back credit and US tech exposure. Investors should rotate towards defensive assets like commodities (gold, oil), gradually add to mid-duration Treasuries, and increase holdings in Chinese stocks
