Signal over Noise with Ulrike Hoffmann-Burchardi

Hello and welcome to Signal over noise. I'm Ulrich Alfambojari, CIO for the Americas and Global

Letter of Equities for UBS wealth management. The markets are facing increased disruption

risks, from two angles, from an escalation of the conflict in the Middle East and from an

inflection in AI. The US attacks on the military facility on Iran's island carc have escalated

the conflict in the Middle East. 90% of Iran's oil exports pass through the island.

President Trump threatened to strike Iran's oil infrastructure on the island, unless Iran

stopped the ticking vessels in the strait of Ramoush. Iran in turn threatened that any attack on

oil and energy infrastructure would lead to strikes on oil facilities in countries cooperating

with the US. This new threat to damage oil infrastructure marks a new level of escalatory rhetoric.

For the markets, the main question has been the timing of the reopening of the strait of Ramoush.

The reopening seems more a question of cost than capabilities. However,

if the energy infrastructure in Iran and the neighboring Gulf states gets damaged,

the question of the strait reopening becomes secondary. If there is no supply, there is no need

for a supply chain. The strait is not only the most important global energy choke point,

accounting for 20% of the world's oil and LNG, but also for other commodities.

Qatar makes more than 30% of the world's helium. Helium is a key input for semiconductor

and industry manufacturing and medical imaging. Also, the strait matters for agricultural

supply chains. Several key inputs for fertilizer production move through the strait. Any length

of disruption will not only impact energy prices, but also food prices and industrial production.

The positive take? The more the conflict edges closer to a dangerous escalation spiral,

the higher the urgency of a resolution. Trump statements that the US has achieved its

military objectives and is now looking for international support in reopening the strait

is a sign that he is looking for an off-ramp. This is encouraging, provided Iran will refrain from

unilaterally and impactfully striking energy infrastructure in the region. If geopolitics did

not dominate the headlines last week, a lot more focus would have been on the fast moving developments

in AI. We are at the precipice of autonomous AI and the coding use case is guiding the way.

Over the last week, auto research has been gaining traction. This is where AI autonomously

improves existing code or creates new code that self validates and improves. To be looked

at the CEO of Shopify, for example, used a coding agent to run experiment on a 20-year-old code base

and found dozens of improvements in the process and perplexity released perplexity personal

computer. It's an always-on AI agent system that runs in a secure environment and extends its AI

agents to enterprise use. The implications from a genetic AI are vast. From who wins and loses

in the public and private markets, to the broader economic impact. Agents are challenging the

modes of existing digital platforms, from search software, social media to e-commerce.

The existing digital platforms are all geared to human, not a genetic decision-making.

Advertising is there to prompt us to purchase a good or service. If agents search and transact,

will advertising from social media and search be as impactful? And e-commerce platforms

optimise to entice us to buy a product or service. For example, with Amazon's famous one-click

checkout technology, our optimised web page design matter. If agents transact, software tools

like Word and Excel are optimised for human reasoning. If an agent can complete tasks independently,

how useful will these tools remain? We downgraded the digital economy sectors partly

because we did not have compelling answers to these questions. Besides the impact to digital

companies, the more structural risk is what happens to the labour market. After block announced

a 40% reduction in its workforce, now matter is following suit. It reportedly plans to lay off

20% of its staff. In our view, the labour force of the digital sector is most at risk.

In particular, internally facing employees who do not have relationships with customers.

They are about 5% of workers directly tight to the digital economy in the US. The next seven

alone employ 1.5% of the US workforce. The highest risk for further layoff is likely with the big four.

They may aim to offset their rising capex with a smaller workforce. The US economy only created

181,000 jobs last year, the weakest since the pandemic year of 2020. If the digital sector laid

off 2% of its workforce, last year's modest shop gains would have flipped to a loss.

Notwithstanding lasting disruptions from the Middle East, we therefore believe a weak labour

market remains likely, prompting rate cuts in the second part of the year. With this backdrop,

we favor a diversified equity exposure with a preference for the physical parts of the economy.

With this, stay well and stay ahead.

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