Tisco Economic Strategy Unit (ESU) is recommending investors prioritise equities, short-term bonds and commodities for their investments, while warning that a rapid rise in US bond yields could trigger a correction in risk assets.
Komsorn Prakobphol, head of Tisco ESU, said the key risk was not the US 10-year Treasury yield reaching 5%, but the speed of its increase.
The yield has risen 0.77 percentage points this year, pressured by geopolitical tensions, higher oil prices, uncertainty over the Federal Reserve and increased long-term bond supply amid large fiscal deficits and artificial intelligence (AI)-related corporate borrowing.
The think tank’s analysis since 1962 shows that gradual increases in yields have generally been absorbed by equity markets when supported by corporate earnings. However, if the 10-year yield rises more than 0.50 percentage points in one month, the probability of a stock market correction of more than 5% over the following three months rises above 50%.
Despite the significant rise in yields, S and P 500 index remains near record highs, suggesting corporate earnings growth has been strong enough to offset pressure from higher bond yields, he said.
Under the base case, with the 10-year yield stabilising around 5%, the S and P 500 could reach 7,800-8,000 points by year-end.
In a downside scenario where the yield rises to 6%, the index could face selling pressure and fall to 6,500 points.
NOT YET A BUBBLE
Tisco ESU does not consider the current AI investment cycle to be a systemic financial bubble comparable with the dotcom or 2008 subprime crisis. Major AI players such as Microsoft, Alphabet, Amazon, Meta and Nvidia have strong balance sheets, high liquidity and established operating revenues.
If returns from AI investment fall short of expectations, companies could reduce investment rather than face the financial distress associated with highly leveraged previous bubbles, noted the research unit.
Head of strategy Thanathat Srisawast said the global AI infrastructure and technology investment cycle have supported corporate earnings and demand for commodities, although simultaneous investment by major economies was also increasing demand for capital and keeping funding costs elevated.
Tisco ESU sees short- to medium-term bonds as more suitable than long-duration debt for now, while maintaining exposure to equities and commodities to capture growth and provide diversification and inflation protection.
SLOWER GROWTH NEXT YEAR
Head of economics Methas Rattanasorn said the Thai economy is expected to grow 2.1% this year, up from the previous 1.8% forecast, supported by exports, private investment and stronger electronics demand linked to the AI cycle.
Growth is forecast to slow to 2% in 2027, as high living costs and energy prices weigh on domestic demand, while fading cost-of-living measures and limited fiscal space constrain government stimulus.
Tisco ESU expects the Bank of Thailand to keep its policy rate at 1% until at least mid-2027, while the baht could weaken to 34.50 to the dollar by the end of 2026.
The unit’s investment stance favours equities for growth exposure, short-term bonds to limit duration risk and commodities as a hedge against inflation and supply shocks, while investors should monitor the pace of US yield increases as a potential trigger for equity market volatility.