Keeping You Informed Matters
Economic Review July 2026
The second quarter saw markets return to the themes that had begun to emerge at the start of the year. As concerns over the Middle East conflict faded into the background, investors refocused on corporate earnings, artificial intelligence and a gradual broadening of market leadership beyond the handful of US technology companies that have dominated returns in recent years.
The Outlook
Risk rewarded
This was a good quarter for risk-takers. Stock markets rose strongly and had their best quarter in six years, driven largely by semiconductor stocks. Bonds were little changed, while oil and gold fell in price. All portfolios gained, with riskier portfolios performing particularly well.
Last quarter, we wrote a lot about the war in the Middle East, including the effective closure of the Strait of Hormuz to shipping in March. Investors had reason to be nervous. However, we also observed that “by examining oil futures, it became clear that energy market participants expected the war to end relatively quickly.” Energy traders appear to have been correct, at least in the short-term, as fears over the impact of the Middle Eastern war have faded dramatically. Risk assets, especially growth shares, rebounded strongly. Of course, a temporary cessation of violence isn’t the same thing as peace, but stock markets haven’t seemed too fussed by these subtleties. They just needed geopolitics to fade into the background so that they could focus on something much more exciting, in this case, earnings!
Chips with everything
Specifically, it’s the earnings growth of semiconductor stocks that has attracted the most attention. As an example, consider chipmaker Micron Technology, which saw revenue for the quarter ending May 28th rise from $9.3 billion to $41.5 billion this year. Earnings rose even more sharply, from $1.9 billion to $28.2 billion – quite incredible! This growth has come about through higher volumes and prices, largely because of the boom in AI capital expenditure. Semiconductor manufacturing is notoriously prone to boom/bust cycles, so semi-stocks rarely trade at high multiples.
Today, Micron trades at around 16x expected 2026 earnings, and 8x expected 2027 earnings. The shares have risen by over 800% in the past year and are now worth $1.3 trillion in total.
And Micron is not unique! There are quite a few other stocks around the world just like this: SK Hynix in South Korea is one; Kioxia in Japan another. Firms that support chip-making, such as ASML in the Netherlands, have also seen their shares surge. Cambridge-based ‘chip architecture’ firm, ARM, saw its shares more than double, just in the last quarter. Needless to say, along with the AI excitement there is huge uncertainty over the specific trajectory of the boom… is this just the start of the spending, or has money been wasted and malinvestment already set in? Maybe both!
By being well diversified, we have benefitted from the semiconductor share price boom in several ways. Both actively managed funds and index funds have had some exposure. Emerging market funds have been particularly helpful, with three large chip-focused firms (SK Hynix, Samsung Electronics and Taiwan Semiconductor Manufacturing Company) making up almost 30% of the emerging market universe today. Momentum funds, which focus on stocks whose share prices have been rising, have also participated strongly. We do know, however, that these gains have been exceptional, and we also know that semiconductor stocks are cyclical. Consequently, we have reduced (but not eliminated) our exposure to some of the strongest-performing areas of the market and added more defensive assets in their place.
Is AI deflationary or inflationary?
Ever since ChatGPT’s public launch in 2022, we’ve watched AI capital spending closely, as it’s clear that this has become an increasingly important driver of corporate earnings and market returns. We’ve also been watching its impact on inflation, as this can be a determinant of interest rates, which influence asset prices.
Now, when the Middle Eastern conflict broke out in late February, oil and gas prices surged, and it seemed that inflation had returned as a problem. US CPI rose to 4.2%, well above target. However, oil prices have since fallen back, and so one could argue that the inflation will be transitory.
There’s a wrinkle to this argument, though, and it’s to do with AI. Many analysts expect AI innovations will ultimately boost productivity and prove highly deflationary. However, the enormous investment required to build AI infrastructure appears to be inflationary in the short term. Demand for electricity, advanced semiconductors and computing capacity has risen sharply, pushing prices higher in areas where supply remains constrained. For example, power prices in the US have risen strongly in recent years, ostensibly on rising demand from data centres. Memory chip prices have also been on a tear. Prices for Apple iPads and MacBooks, which contain several types of memory chip, have recently risen by 15-20%. This is extraordinary – for almost all our lives, consumer electronics have been falling in price, but not now. Inflationary impulses like this can (should!) put pressure on interest rates and, in turn, asset prices.
Portfolios
As mentioned earlier, we reduced (but did not eliminate) exposure to funds with heavy exposure to semiconductor stocks. We did the same with gold, reducing exposure to the Royal Mint Physical Gold exchange traded certificate, following meaningful price strength in 2024 and 2025.
We reinvested the proceeds into defensively managed funds such as Ruffer Diversified Return, modestly reducing overall portfolio risk. While we continue to believe artificial intelligence represents one of the most important long-term investment themes, recent gains have been exceptional and valuations in parts of the sector have become increasingly demanding. Rather than attempting to maximise short-term returns, we’ve chosen to crystallise some profits while maintaining meaningful exposure to the structural opportunities we continue to see.
We’ve no idea what shocks the rest of the year will bring, but we do know that there is a combination of high hopes, profound uncertainty, and enormous capital raising around AI. We think it’s prudent to reduce risk gradually.
There is, of course, plenty of other news, including an impending change of UK Prime Minister to Andy Burnham, European defence spending continues to evolve, private equity and private credit remain under pressure, government borrowing is increasingly in focus and crypto-currencies have continued to struggle. Yet, this quarter, the AI investment cycle dominated investor attention and outweighed many of these concerns. None of these issues have disappeared, but for now markets appear content to focus on earnings growth and the opportunities – and risks – presented by artificial intelligence.
Key facts about the world
United Kingdom
- UK CPI was 2.8% in May, unchanged from April and still above the Bank of England’s 2% target.
- UK CPIH inflation, which includes housing costs, was 3.0% in May, also unchanged from April.
- Barclays estimated that excluding gilts from UK bank leverage rules could increase gilt demand by up to £150bn and save the government around £2.5bn annually in borrowing costs.
Europe
- NATO allies have committed to investing 5% of GDP annually on defence by 2035, more than double the old 2% target.
- EU defence expenditure rose from 1.6% of GDP in 2023 to 1.9% in 2024, and is expected to reach 2.1% in 2025, equivalent to €381bn.
- Poland is already spending around 4.3% of GDP on defence, while Germany has committed more than €200bn by 2030.
Asia
- Asian equity markets had an extraordinary Q2: Reuters reported the Nikkei (Japan) up 37%, Kospi (South Korea) up 68% and Taiwan’s Taiex up 45% over the quarter.
- SK Hynix overtook Samsung to become South Korea’s most valuable listed company in June, reaching a market capitalisation of $1.35tn.
- Three companies – Samsung Electronics, SK Hynix and Micron Technology – now produce almost 90% of the world’s Dynamic Random Access Memory (DRAM) chips, the high-speed memory used in AI servers and data centres.
North America
- The S&P 500 (+14.1%) and Nasdaq (26.7%) recorded their biggest quarterly gains since 2020 in Q2, while the Dow (+12.2%) had its strongest quarter since 2022.
- The MSCI World Index rose almost 14% during Q2, helped primarily by the continued strength of US equities, which now account for around 72% of the index by market capitalisation.
- Gartner (an American research and advisory firm) forecasts worldwide AI spending will reach $2.52tn in 2026, with AI infrastructure alone adding $401bn as technology companies continue building out the foundations for artificial intelligence.
South America
- Latin America and Caribbean growth is forecast to slow to 2.2% in 2026, before improving to 2.5% in 2027.
- Brazil cut its Selic rate by 0.25% to 14.25% in June, its third consecutive quarter-point cut.
- Argentina’s economic activity grew by only 1.6% in April, below the 2.2% expected by analysts and sharply slower than March’s 6.2% growth.
Africa
- The African Development Bank expects Africa’s economy to grow 4.2% in 2026, down slightly from 4.4% in 2025, before recovering to 4.4% in 2027.
- Ghana’s GSE Composite Index gained around 65% during the first half of 2026, making it one of the world’s best-performing stock markets.
- Nigeria’s NGX Industrial Index rose almost 70% during the first half of 2026, while the NGX All Share Index gained around 45%, placing it among Africa’s strongest equity markets.
Q2 2026 Performance Review
Unconstrained strategies
Key facts
Strong positive returns across all risk assets, led by global equities and AI-related technology
Momentum strategies were the standout contributors as semiconductor stocks continued to outperform
Gold, commodities and European defence gave back some of their exceptional gains from the previous quarter as geopolitical tensions eased
Fixed income provided modest positive returns, while alternatives delivered mixed performance
Key trades: trimmed momentum exposure, reduced gold following strong gains, increased Ruffer Diversified Return, added selectively to European defence following weakness, and raised cash through further profit-taking at quarter end
Summary
The Unconstrained strategies delivered another strong quarter, benefitting from the continued recovery in global equity markets and exceptional performance from technology and artificial intelligence-related companies. Market leadership broadened as the quarter progressed, with Europe, Japan and selected emerging markets joining the rally, although momentum and semiconductor-related companies remained the principal drivers of returns.
The standout performers were our momentum strategies. The iShares Edge MSCI USA Momentum ETF (+51.8%) and Xtrackers MSCI World Momentum ETF (+37.2%) generated exceptional returns as investor enthusiasm surrounding artificial intelligence and semiconductor companies continued. Strong contributions also came from Vanguard ESG Developed Asia Pacific (+25.4%), JPMorgan US Small Cap Equity (+22.5%), Vanguard Global Small Cap (+17.0%), Vanguard Emerging Markets (+14.9%) and BNY Mellon US Equity Income (+12.4%), demonstrating that gains extended well beyond the largest US technology companies and highlighting the benefits of maintaining diversified exposure across investment styles.
The quarter also illustrated the importance of diversification. Following exceptionally strong performance earlier in the year, several of our alternative holdings experienced healthy consolidations. The Royal Mint Physical Gold ETC (-11.7%) and L&G All Commodities ETF (-8.5%) both gave back some of their exceptional gains as geopolitical tensions eased and investors rotated further towards growth assets. The WisdomTree Europe Defence ETF (-5.5%) also weakened after a strong run, although we continue to view this as a long-term thematic allocation rather than a short-term geopolitical trade.
Fixed income delivered modest positive returns, with shorter-duration government bonds, corporate bonds and inflation-linked securities all contributing to portfolio stability. Alternative investments produced more mixed outcomes.
The TM Gravis UK Infrastructure Fund (+10.9%) benefitted from improving investor sentiment towards infrastructure assets, while Trium Alternative Growth (-4.8%) and the Ruffer Diversified Return Fund (-1.3%) reflected their more defensive characteristics in a quarter dominated by strong equity markets.
Portfolio activity remained focused on disciplined risk management rather than attempting to maximise short-term returns. During May we reduced exposure to our strongest-performing momentum strategies and trimmed the Royal Mint Physical Gold ETC following its exceptional gains over the previous 18 months. The proceeds were primarily reinvested into the Ruffer Diversified Return Fund, modestly reducing overall portfolio risk while maintaining exposure to long-term structural themes.
We also added selectively to the WisdomTree Europe Defence ETF, introducing the position into the Growth strategy and increasing exposure within Adventurous portfolios. While the sector had weakened following improving sentiment surrounding the Middle East conflict, we continue to believe that higher structural defence spending across Europe remains a compelling long-term investment theme.
Finally, following further strength in momentum strategies during June, we undertook further gradual de-risking, trimming positions back towards their strategic target weights and increasing cash holdings modestly. These changes reflect our continued belief that successful investing is not about maximising returns in the strongest-performing sectors, but about participating in long-term opportunities while managing portfolio risk as valuations become increasingly demanding.
Overall, the Unconstrained strategies remain well positioned. The portfolios continue to participate in the structural opportunities presented by artificial intelligence and global equity markets, while the gradual rebalancing undertaken during the quarter has modestly reduced overall risk. We believe this leaves portfolios well balanced for a wide range of potential market outcomes during the second half of the year.
| SECTOR | Q2 2026 | 1 year to 30/06/26 | 1 year to 30/06/25 | 1 year to 30/06/24 | 1 year to 30/06/23 | 1 year to 30/06/22 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| IA UK Index Linked Gilts | 0.0% | 2.1% | -6.1% | 0.0% | -16.8% | -20.2% | -8.6% |
| IA £ Corporate Bond | 2.8% | 4.5% | 5.7% | 10.5% | -4.8% | -13.1% | 0.2% |
| IA Property | 3.9% | 9.0% | 6.0% | -0.6% | -15.9% | 19.9% | 3.0% |
| IA UK Equity Income | 6.9% | 15.1% | 10.5% | 14.6% | 4.0% | -0.6% | 8.6% |
| IA UK Smaller Companies | 10.7% | 2.5% | 2.4% | 13.9% | -5.7% | -22.6% | -2.7% |
| IA North America | 14.2% | 22.2% | 4.7% | 21.3% | 11.9% | -3.7% | 10.8% |
| IA Europe Excluding UK | 12.7% | 17.4% | 9.0% | 11.7% | 18.6% | -12.5% | 8.2% |
| IA Japan | 14.4% | 32.5% | 7.4% | 10.1% | 12.4% | -11.8% | 9.2% |
| IA Asia Pacific Excluding Japan | 23.7% | 46.8% | 4.6% | 10.0% | -3.1% | -10.8% | 7.9% |
| IA Global Emerging Markets | 22.5% | 46.4% | 4.9% | 11.6% | -0.3% | -17.3% | 7.2% |
Source: Morningstar in GBP. Net income reinvested. Past performance is not a reliable indicator of future results.
The positioning of our Unconstrained strategies
Cautious
Growth
Balanced
Adventurous
Q2 2026 Performance Review
Ethical strategies
Key facts
Positive returns across all Ethical strategies, supported by a broad recovery in global equity markets
Strong contributions from Asia Pacific, developed world, sustainable global equity and UK income strategies
Gold detracted as safe-haven demand eased during the quarter
Fixed income provided modest positive returns and continued to support overall diversification
Key trades: introduced WisdomTree Agriculture ETF, reduced Jupiter Ecology and infrastructure exposure to fund the purchase, and modestly increased cash by trimming Emerging Markets at quarter end
Summary
The Ethical strategies delivered another positive quarter, benefitting from improving sentiment across global equity markets and a broader recovery in international shares. While returns were more modest than the Unconstrained strategies, reflecting the absence of dedicated momentum allocations, performance remained robust and broadly in line with expectations for the ethical investment universe.
Returns were generated across a broad range of equity holdings. Global and regional equity exposures performed strongly, with Vanguard ESG Developed Asia Pacific (+25.4%), Vanguard ESG North America (+21.1%), Vanguard ESG Screened Developed World (+20.5%), Janus Henderson Global Sustainable Equity (+15.8%), Vanguard ESG Emerging Markets (+14.7%) and BNY Mellon Global Equity Income (+13.0%) all benefitting from improving investor sentiment and a broadening of market leadership.
Specialist and thematic holdings also contributed positively. EdenTree Sustainable European Equity (+15.3%) and Jupiter Ecology (+13.4%) performed well, supported by the wider recovery in sustainable and growth-oriented equities. UK equity exposure was also positive, led by Montanaro UK Income (+14.5%), Janus Henderson UK Responsible Income (+10.7%) and the Amundi MSCI UK SRI ETF (+10.4%).
Alternative investments produced more mixed outcomes. TM Gravis UK Infrastructure (+10.9%) continued to perform well as investor sentiment towards infrastructure assets improved, while the Royal Mint Physical Gold ETC (-11.7%) gave back some of its exceptional gains over the previous 18 months (+97.4% to the peak) as geopolitical tensions eased and safe-haven demand moderated. The newly introduced WisdomTree Agriculture ETF also experienced a weak start (-2.2%), although the long-term investment case remains centred on structural pressures surrounding food security, changing weather patterns and global supply constraints rather than short-term market movements.
Fixed income once again provided stability, with corporate, green and sustainable bond funds all delivering modest positive returns. While bonds were not a major driver of performance, they continued to fulfil their role as an important source of diversification within lower-risk portfolios.
Portfolio activity during the quarter remained focused on improving diversification and managing risk within the constraints of the ethical investment universe. We reduced positions in TM Gravis UK Infrastructure and Jupiter Ecology to introduce the WisdomTree Agriculture ETF, providing exposure to another long-term structural theme that we believe complements existing portfolio holdings. Agriculture remains an underrepresented area within ethical investing and offers a differentiated source of return over the longer term.
Towards the end of June, we also modestly reduced Vanguard ESG Emerging Markets following its continued strong performance, increasing cash holdings and bringing allocations back to their strategic targets. Unlike our Unconstrained strategies, where significant momentum gains created opportunities for more meaningful profit taking, the Ethical strategies have naturally experienced a broader and more balanced pattern of returns. As a result, portfolio changes were more measured, reflecting our continued preference for gradual risk management rather than unnecessary trading.
Overall, the Ethical strategies remain well positioned and continue to provide diversified exposure to high-quality companies aligned with long-term sustainability themes. We remain confident that the disciplined investment process and gradual evolution of the opportunity set within ethical investing will continue to serve investors well over the long term.
| SECTOR | Q2 2026 | 1 year to 30/06/26 | 1 year to 30/06/25 | 1 year to 30/06/24 | 1 year to 30/06/23 | 1 year to 30/06/22 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| Global Sustainable | 9.1% | 13.7% | 4.5% | 17.8% | 10.5% | -5.8% | 7.3% |
| UK ESG Enhanced | 5.0% | 16.9% | 10.1% | 14.0% | 9.2% | -0.9% | 9.9% |
| US ESG Enhanced | 15.9% | 26.7% | 5.9% | 24.9% | 13.7% | -1.5% | 12.0% |
| Developed Market Europe Sustainable | 9.7% | 19.6% | 7.1% | 12.6% | 14.8% | -10.3% | 8.1% |
| Emerging Market ESG Enhanced | 25.9% | 46.6% | 2.7% | 10.1% | -4.5% | -15.2% | 2.1% |
| UK Corporate Bond Sustainable | 3.0% | 4.2% | 5.1% | 10.5% | -8.3% | -15.1% | -1.4% |
| Global Corporate Bond Sustainable | 0.8% | 5.8% | 1.1% | 4.9% | -2.8% | -5.7% | 0.9% |
| Global Green Bond | 0.8% | 3.3% | 4.1% | 3.4% | -4.6% | -11.6% | -1.3% |
| Global Renewable Energy | 6.2% | 25.6% | 3.1% | 1.6% | 5.9% | 0.5% | 6.4% |
Source: Morningstar sustainable indices in GBP. Net income reinvested. Past performance is not a reliable indicator of future results.
The positioning of our Ethical strategies
Cautious
Growth
Balanced
Adventurous
Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.