09 Jul 2026
As we approach the end of the first half of 2026, now seems a good time to pause, take stock, and look forward to the second half. We’ve seen plenty of drama so far this year, such as heightened volatility and shifting leadership within equity markets. And, of course, geopolitics has once again become a major driver of investor sentiment.
The Iran conflict cast a long shadow over the global outlook for much of Q2. Although we appear to be moving towards a resolution, the events have created a more complicated environment for investors and highlighted the benefit of building portfolios that can navigate several different outcomes simultaneously rather than positioning them for a single dominant scenario.
Despite the market volatility experienced earlier this year, remaining invested and focusing on long-term fundamentals has served us well. History often shows that reacting too quickly to geopolitical shocks can prove counterproductive. We have therefore used periods of weakness selectively, adding to areas that align with our longer-term convictions while avoiding the temptation to trade too aggressively.
As for the remainder of 2026, we believe it is likely to be shaped by three broad themes: the interaction between inflation, policy, and geopolitics; the increasingly favourable backdrop for selective emerging markets; the continued strength of the AI investment cycle.
The conflict in the Middle East and the closure of the Strait of Hormuz has complicated the outlook for inflation and policy rates. These pressures may be abating, but the impact will be felt for some time. The US has been relatively shielded, supported by resilient growth and ongoing fiscal stimulus. Conversely, the UK and Europe have been more exposed and are vulnerable to higher energy prices and weaker consumer confidence.
The UK is a particular concern. The growth backdrop remains fragile while political uncertainty adds another layer of caution. We think the risk of recession remains higher here than in some other developed markets. As a result, we have reduced exposure to more domestically-sensitive UK companies within the FTSE 250 Index.
On the flipside, we have selectively increased exposure to those areas we think will benefit from the easing of geopolitical tensions and the stabilisation of growth expectations. Industrial metals are one example and so we have increased our exposure to commodities such as copper, aluminium, zinc, and nickel. Copper demand continues to benefit from structural themes linked to electrification and signs of stabilisation in China. Meanwhile, there could be further upward pressure on nickel prices if there is a prolonged disruption to global supply chains.
More broadly, commodities play an important role in portfolio construction. They provide exposure to cyclical growth but also offer protection if inflation proves more stubborn than expected. Gold remains a particularly important holding for us. Government bonds have traditionally been used for portfolio protection during periods of stress and uncertainty. However, when inflation risks are high, bonds are not necessarily a great diversifier. Historically, gold has behaved more resiliently in inflationary environments.
Emerging markets are one of our main themes this year. Broadly, fundamentals remain healthy, valuations are attractive relative to developed markets, and several central banks have the flexibility to ease policy. What’s more, a weaker US dollar over the medium term should provide support.
A note of caution is that the Iran conflict has increased dispersion within emerging economies. Economies that rely heavily on imported energy, particularly in parts of Asia, have been more vulnerable to higher energy costs and supply disruption. By contrast, commodity exporters in Latin America were generally better placed to benefit from elevated commodity prices and stronger terms of trade.
Given this backdrop, we have tilted our exposure towards Latin American equities at the expense of Asian emerging economies. In particular, we favour Brazil, which offers attractive valuations relative to history and to broader emerging markets. Domestic fundamentals are supportive and the country has the additional benefit of being a net commodity exporter. A further attraction is that the Brazilian central bank has also started a rate-cutting cycle and should have scope to continue should the Strait of Hormuz reopen, which would provide support for both economic activity and share valuations over time.
AI has remained a dominant market theme this year. We see the underlying earnings trajectory linked to AI infrastructure and adoption remaining very strong, particularly within hardware and semiconductors. The scale of capital expenditure tied to AI development continues to support earnings growth across large parts of the technology sector. As such, we have added to our tech exposure, focusing on high-quality AI beneficiaries. However, we are increasingly mindful of growing market concentration and high valuations, which reinforces the need for careful positioning over blanket enthusiasm.
Alternatives exposure also continues to play an important role within our portfolios. Absolute return strategies, commodities, and diversified alternatives all help broaden the range of return drivers – this can be particularly so during those periods when traditional asset class relationships become less reliable.
Ultimately, our focus is on building portfolios that can benefit from growth opportunities but can remain resilient across a wide range of market outcomes. We believe the current market environment requires a measured approach, not reckless aggression. In portfolio terms, our aim is to deliver consistent returns over time through a range of different exposures and themes, rather than through maintaining a handful of high-risk positions. We believe this philosophy, in an environment where market conditions can shift quickly and unpredictably, is a sensible way to approach the second half of the year.