Keeping You Informed Matters
Economic Review October 2026
The third quarter saw an unusual combination of resilient equity markets, rising commodity prices and a sharp sell-off in government bonds. Despite renewed geopolitical tensions, shares remained close to record highs, but it was the supposedly safe and boring government bonds that provided some of the quarter’s biggest surprises.
The Outlook
Warm up
In the TV show Family Fortunes, which ran for about forty years in the UK, the format was quite simple. One hundred members of the public were asked for word associations, and the show’s contestants had to guess the most common answers given. A typical question might be “Name something you would hate to forget when going on holiday” and contestants might guess the answers to be: passport, tickets, clothes/underwear, phone etc.
So, let’s play Family Fortunes. Here we go: “We asked 100 people to name a feeling you associate with investing in government bonds.” Now, what do you think they said?
While you ponder your answers, I’ll mention that I asked my AI chatbot the same question. It replied very quickly:
“Safe, Secure, Boring, Reliable, Low-risk, Stable.”
There was also some small print beneath these answers, which looked very much like a disclaimer. That was probably wise, because here are a few recent headlines from the financial press:
“Global Bond Rout Sends Yields Soaring” – Bloomberg, 1st September
“Morning Bid: Bonds steal the show” – Reuters, 25th September
“Global bond sell-off deepens as 10-year Treasury yield hits highest since 2002” – Financial Times, 1st October
This is not what investors expect from their government bonds! What’s going on?
Bond shocker
Bond yields have been rising rapidly in the US, Canada, UK, France, Germany, Japan, Australia… in fact, in most countries other than China. For example, the US 10-year Treasury bond yield rose from 4.44% to 5.29% during the third quarter. As bond analysts regularly remind us: rising yields mean falling prices, so it’s been a tough time for bond investors. It’s even possible to find long-dated government bonds in the US and UK that have halved in price over the past five or six years, as yields rose from under 1% to well over 5% today.
There’s no general agreement on why yields are rising so fast. Likely explanations include war in the Middle East and rising inflationary expectations, uncontrolled fiscal deficits, reduced demand from major buyers, high nominal GDP growth…
Chinese consumer price inflation (CPI) is currently reported to be less than 1%, and its bond market has been relatively calm. CPI in the US and UK is about four times higher, while yields are surging. We think inflation expectations are at least part of the explanation. But another interesting angle is that, at the time of writing, the US economy is growing at 5.0%, according to the Atlanta Fed’s “GDP Now” estimate. Combine this with annualised CPI of 3.4% and nominal US economic growth must be running at over 8% – that’s phenomenal! No wonder bond yields are rising.
And why is the US economy booming; and possibly overheating? There isn’t one simple answer. Government borrowing remains high, the war in the Middle East has pushed energy prices higher and, as already mentioned, fiscal deficits remain substantial.
But one increasingly important contributor is the extraordinary scale of the data-centre build-out required for AI growth. Data centres require chips, land, steel, copper, power… and lots of financing. When you analyse it in detail, the scale of building is quite staggering. And although it’s centred on the USA, there’s plenty of work going on elsewhere too and it’s growing rapidly.
Positives and negatives for equities
Strong nominal economic growth on its own might be considered a tailwind for shares, as company revenues should be growing nicely. At the same time, though, rising interest rates and bond yields create a headwind for equities (the marginal cost of corporate borrowing rises; and bond yields begin to seem more attractive than earnings yields). Putting these crosswinds together, we can see that shares are close to their all-time highs but struggling to make headway. It’s a fine balance.
Portfolio positioning
At times of above target inflation and strong economic growth, one would normally expect commodity prices to do well. Indeed, this has been the case recently. Not only have oil and gas prices risen – at least partly due to the impact of wars on supply – but industrial metals have been strong too, perhaps related to the energy transition and the data-centre build-out. Even agricultural commodities, previously a laggard, have begun to catch up. During the quarter, all portfolios had exposure to commodity futures via exchange-traded funds: unconstrained portfolios held broad commodity exposure and ethical mandates were exposed to agricultural commodities.
Equities were mixed but, on average, slightly higher over the quarter. As discussed in last quarter’s note, we have reduced equity exposure towards the lower end of our bands after strong gains and added more defensive funds in their place.
The rise in bond yields has led to significant losses for long-dated bonds. But for shorter duration bonds, which are less sensitive to changes in yield, capital losses have been small enough to be outweighed by the interest on the bonds. Our portfolios have been skewed towards shorter-dated bonds and so have been comparatively resilient during the bond rout.
Outlook
The path of government bond yields will be very important for the quarter ahead. Developments in AI financing will probably also matter: will new data-centre projects be able to raise debt finance at competitive rates, or will some of these financings fail? Will Anthropic AI be able to launch its Initial Public Offering at the mooted $2 trillion valuation, or will it be deferred? And will data-centre builders such as SB Energy and Nscale succeed in issuing new shares to finance their growth ambitions? It seems clear that forthcoming events in financial markets will have the power to shape the path of the real economy, just as the economy itself affects asset prices. We shall be paying attention.
Key facts about the world
United Kingdom
- The UK sold £4.25bn of 30-year government debt in September at a yield of 5.82% – the highest yield at a gilt auction or syndication since comparable Debt Management Office records began in 1998. Despite that yield, investors submitted £87.2bn of orders.
- The UK’s 30-year gilt yield has more recently moved above 6%, its highest level since 1998, as the global bond sell-off intensified.
- UK government debt-interest costs are projected at around £109bn this year, equivalent to approximately 8.4% of public spending.
Europe
- The STOXX Europe 600 fell approximately 1% during Q3, despite global equities remaining close to record highs, reflecting Europe’s lower exposure to the AI investment boom and greater sensitivity to higher energy costs.
- French 10-year government borrowing costs reached their highest level since 2002, while the yield on German government debt rose towards levels last experienced during the Eurozone sovereign-debt crisis.
- By early October, advanced economies were estimated to have spent more than $3.3 trillion over the previous year simply paying interest on internationally traded government bonds – more than estimated global spending on AI, defence or clean energy.
Asia
- Japan’s 10-year government bond yield rose by around 42 basis points during Q3 – its largest quarterly increase in more than two decades.
- South Korea’s technology-heavy KOSPI index fell almost 20% during Q3, its worst quarter since the pandemic, despite remaining roughly twice as valuable as a year earlier following the extraordinary AI-driven rally.
- Copper – essential for electricity grids and AI data centres – reached $14,343 per tonne during August, within 1.3% of its record. US COMEX copper inventories had risen to a record 675,185 tonnes as traders moved metal ahead of possible tariffs.
North America
- The US 10-year Treasury yield rose by more than 80 basis points during Q3, its largest quarterly increase in several years, before moving above 5% and subsequently reaching its highest level since 2002.
- Despite the bond-market turmoil, global equities finished Q3 only around 2% below their all-time high and more than 12% higher year-to-date, having added approximately $3 trillion in value during the quarter.
- Analysts expect S&P 500 earnings to increase by at least 30% during 2026, an extraordinary rate of profit growth that has helped equities withstand sharply higher borrowing costs.
- US crude oil production reached a record 13.955 million barrels per day in late September, even as disruption elsewhere pushed oil prices sharply higher.
Other World Facts
- Oil rose around 40% during Q3 and 70% over the year, making it Brent crude’s second-largest quarterly increase since the pandemic rebound of Q2 2020.
- The Food and Agriculture Organization (FAO) World Food Price Index reached its highest level since November 2022 in September; sugar prices rose 6.1% in the month and wheat touched a three-year high amid weather and trade disruption.
- Diesel, petrol and jet-fuel prices were estimated to be 60–97% above pre-conflict levels by the end of Q3 as the Iran war and limited refining capacity continued to disrupt energy markets.
Q3 2026 Performance Review
Unconstrained strategies
Key facts
Positive but more mixed equity returns, with UK and Japanese equities amongst the strongest contributors while US momentum and smaller companies weakened
Commodities were the standout contributor, benefiting from higher energy and industrial commodity prices during the quarter
Alternatives generally provided positive diversification, with infrastructure, gold, Trium and Ruffer all contributing
Fixed income was challenged by the sharp global rise in government bond yields, although our preference for shorter duration helped limit losses
Key trades: continued profit-taking from strong-performing equity positions, maintained higher cash and defensive allocations, and introduced long-duration US inflation-linked bonds following the substantial rise in real and nominal yields
Summary
The Unconstrained strategies made positive returns in a difficult third quarter, but the sources of return were very different from Q2’s exceptional equity-led gains. Global equity markets remained surprisingly resilient despite sharply rising government bond yields, renewed tensions in the Middle East and oil prices moving back above $100 per barrel. Indeed, global equity indices ended the quarter only around 2% below their record highs and remained more than 12% higher for the year.
The headline numbers concealed wide differences between markets and styles. Our strongest-performing equity holding was Zennor Japan (+11.4%), while UK equities also performed well, with the Vanguard FTSE 250 ETF (+7.4%) and Jupiter UK Dynamic Equity (+5.7%) contributing positively. These returns contrasted with weakness in some of the areas that had led markets earlier in the year. The Xtrackers MSCI World Momentum ETF (-4.7%), JPMorgan US Small Cap ETF (-5.9%) and iShares USA Momentum ETF (-8.7%) all declined during the quarter.
This reversal matters because of the portfolio changes made earlier in the year. Following exceptional gains during Q2, we progressively reduced momentum, US smaller-company, emerging-market and Asia-Pacific exposure and increased cash holdings. We weren’t aiming to remove these positions as they remain important components of our longer-term strategy, but instead we took profits and brought allocations back towards their strategic weights. The later weakness in several of these holdings shows why we rebalance after unusually strong returns.
The standout portfolio contribution came instead from commodities. The L&G All Commodities ETF returned 16.0%, benefiting from renewed strength across energy and industrial commodities. Oil prices were particularly volatile as the conflict involving the US, Israel and Iran continued to disrupt Middle Eastern supply: Brent rose around 40% during Q3 and finished the period back above $100 per barrel. The allocation provided useful diversification just as inflation and geopolitical risk returned to investors’ concerns.
Other diversifying assets also contributed. TM Gravis UK Infrastructure (+4.1%), Trium Alternative Growth (+3.9%) and the Royal Mint Physical Gold ETC (+3.6%) all generated positive returns, while Ruffer Diversified Return (+0.4%) was broadly stable. The individual gains were modest, but together they show the value of owning assets driven by something other than conventional equity and bond markets.
Fixed income had a much more difficult quarter. Government bond yields rose sharply across most developed markets during the quarter as investors reassessed inflation, economic growth, government borrowing and the likely path of interest rates. The US 10-year Treasury yield rose by more than 0.8% during Q3, while Japanese, German, French and UK borrowing costs also reached multi-year or multi-decade highs.
Our portfolios were comparatively well protected because fixed income exposure had already been biased towards shorter duration securities. The Invesco UK Gilt 1–5 Year ETF (-0.6%) and TwentyFour Sustainable Short Term Bond Fund (-1.0%) experienced relatively modest declines, whereas longer-duration holdings such as L&G All Stocks Index-Linked Gilts (-1.8%) and the Amundi UK Government Bond ETF (-2.5%) were more affected by the rise in yields. This is the duration effect discussed in the main commentary: shorter-dated bonds have been much less sensitive to the dramatic repricing occurring at the long end of government bond markets.
Towards the end of September, we used this repricing to make a further strategic change, reducing UK government and index-linked bond exposure and introducing the UBS Bloomberg 10+ Year US TIPS ETF. The position has moved against us in the short term, the holding has fallen approximately 3.4% since purchase, as long-term US yields continued to rise. We knew this could happen when we made the investment. The purpose of the allocation is not to provide immediate short-term protection, but to take advantage of materially higher real yields and provide longer-term protection against persistent US inflation. Having deliberately avoided substantial long-duration exposure while yields were rising, we believe the repricing is gradually creating a more attractive entry point for long-term investors.
Q3 has demonstrated why we have progressively diversified portfolios rather than attempting to predict a single market outcome. Commodities and alternatives contributed as bonds struggled; selected equity markets performed well as previous leaders weakened; and the cash raised through earlier profit-taking has allowed us to respond to opportunities created by market volatility. We remain cautious, but not gloomy. We will participate where we see attractive long-term opportunities, while keeping the flexibility to take profits or add defensive assets when valuations and market conditions justify it.
| SECTOR | Q3 2026 | 1 year to 30/09/26 | 1 year to 30/09/25 | 1 year to 30/09/24 | 1 year to 30/09/23 | 1 year to 30/09/22 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| IA UK Index Linked Gilts | -2.1% | 2.1% | -9.4% | 6.2% | -9.8% | -31.0% | -9.4% |
| IA £ Corporate Bond | -2.0% | 1.5% | 4.0% | 11.1% | 7.1% | -20.8% | -0.1% |
| IA Property | -1.3% | 5.0% | 5.0% | 3.4% | -13.1% | 10.6% | 1.8% |
| IA UK Equity Income | 3.7% | 16.1% | 10.6% | 15.2% | 13.3% | -8.8% | 8.8% |
| IA UK Smaller Companies | 6.6% | 9.6% | 2.3% | 15.7% | 2.1% | -32.4% | -2.2% |
| IA North America | 0.6% | 13.6% | 13.4% | 20.6% | 8.1% | -2.4% | 10.4% |
| IA Europe Excluding UK | -1.6% | 12.2% | 11.8% | 14.6% | 19.0% | -16.0% | 7.5% |
| IA Japan | 5.1% | 27.2% | 15.9% | 10.9% | 10.7% | -15.9% | 8.8% |
| IA Asia Pacific Excluding Japan | -0.5% | 30.2% | 14.0% | 14.1% | 0.3% | -10.5% | 8.7% |
| IA Global Emerging Markets | -1.1% | 29.7% | 15.5% | 13.0% | 2.6% | -15.5% | 8.0% |
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
Q3 2026 Performance Review
Ethical strategies
Key facts
Positive returns from most equity holdings, with UK income, North American and sustainable global equities contributing
Agriculture was the standout portfolio holding, rising almost 12% as agricultural commodity prices strengthened
Infrastructure and gold also contributed positively, demonstrating the benefit of diversifying beyond conventional equities and bonds
Sustainable fixed income was negatively affected by the global rise in government bond yields, particularly among longer-duration holdings
Key trades: further profit-taking from Emerging Markets and Asia-Pacific equities, maintained additional cash and introduced US inflation-linked bonds to broaden inflation protection within Ethical portfolios
Summary
Returns across the Ethical strategies were mixed during Q3. While equity markets remained broadly resilient and several diversifying holdings made positive contributions, the sharp rise in global government bond yields weighed on sustainable fixed-income allocations, particularly longer-duration bonds. This created a headwind for the lower-risk portfolios, whereas strategies with higher equity exposure were generally able to offset much of the weakness.
Equity performance was broadly positive. Montanaro UK Income (+4.8%) was the strongest conventional equity contributor, while the Vanguard ESG North America (+2.4%), Janus Henderson Global Sustainable Equity (+1.9%) and Janus Henderson UK Responsible Income (+1.8%) all generated gains. That was encouraging, given the pressure that rising bond yields put on equity valuations late in the quarter.
The strongest contribution came from an allocation introduced earlier this year. The WisdomTree Agriculture ETF returned 12.0% during Q3, a sharp reversal from its modestly negative initial performance following purchase. In Q2 we described agriculture as an underrepresented area within ethical investing offering differentiated exposure to food security, changing weather patterns and global supply constraints. Those themes became much clearer during the third quarter.
Agricultural markets were supported by adverse weather, disrupted trade routes and broader inflationary pressures. The UN Food and Agriculture Organization subsequently reported that global food prices reached their highest level in almost four years in September, with sugar prices rising to an 18-month high and wheat reaching a three-year high during the month. While we wouldn’t extrapolate one quarter’s strong return, this demonstrates precisely why agriculture was introduced: its underlying return drivers are different from both conventional equity markets and traditional fixed income.
Other diversifying holdings also helped. TM Gravis UK Infrastructure (+4.1%), the Royal Mint Physical Gold ETC (+3.6%) and Trojan Ethical (+1.2%) all contributed positively. These allocations remain particularly valuable within Ethical portfolios, where the investible universe for traditional diversifiers can be narrower than in our Unconstrained strategies.
The principal area of weakness was fixed income. TwentyFour Sustainable Short Term Bond (-1.0%) again demonstrated the relative resilience of shorter-duration bonds, while Rathbone Ethical Bond (-2.5%), Liontrust Sustainable Future Corporate Bond (-3.0%), Goldman Sachs Global Green Bond ETF (-3.0%) and Aegon Global Sustainable Sovereign Bond (-3.5%) were more affected by the sharp rise in global yields.
This weakness reflected the wider bond-market environment, not a deterioration in the sustainability characteristics or investment cases of these holdings. The quarter was a reminder that a sustainable, high-quality investment can still carry interest-rate and duration risk.
As with the Unconstrained strategies, we continued the gradual risk reduction undertaken earlier in the year. Following strong previous gains, Emerging Market and Developed Asia-Pacific equity allocations were trimmed back towards strategic weights and cash increased. During September we also introduced the UBS Bloomberg 10+ Year US TIPS ETF, which meets our Ethical investment criteria, funded through a combination of cash and reductions in existing sustainable corporate, green and sovereign bond holdings.
This new holding has initially fallen by around 3.4% since purchase, reflecting the continuing rise in long-term US yields. We regard this as a strategic allocation rather than a short-term trade. The substantial repricing of US inflation-linked government bonds has increased their prospective real return while introducing a different source of inflation protection into portfolios, which is particularly useful when both energy and food price pressures remain elevated.
The Ethical strategies remain well diversified within the constraints of the investment universe. Q3 provided a good example: agriculture, infrastructure and gold provided positive returns while sustainable bonds struggled, showing that diversification comes from owning assets exposed to different economic forces, not simply from holding more funds.
| SECTOR | Q3 2026 | 1 year to 30/09/26 | 1 year to 30/09/25 | 1 year to 30/09/24 | 1 year to 30/09/23 | 1 year to 30/09/22 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| Global Sustainable | 4.0% | 11.0% | 10.9% | 19.2% | 9.4% | -6.8% | 7.3% |
| UK ESG Enhanced | 2.3% | 14.1% | 12.8% | 13.9% | 17.3% | -7.4% | 9.9% |
| US ESG Enhanced | 2.5% | 17.7% | 16.7% | 23.9% | 11.2% | -1.2% | 12.0% |
| Developed Market Europe Sustainable | -1.7% | 12.2% | 10.5% | 17.4% | 15.2% | -13.7% | 8.1% |
| Emerging Market ESG Enhanced | -0.9% | 31.7% | 11.3% | 10.5% | 0.2% | -12.9% | 2.1% |
| UK Corporate Bond Sustainable | -2.4% | 1.2% | 3.1% | 11.0% | 7.8% | -25.5% | -1.4% |
| Global Corporate Bond Sustainable | -3.8% | -1.8% | 4.4% | 4.2% | -3.0% | -6.0% | 0.9% |
| Global Green Bond | -4.1% | -3.1% | 5.2% | 4.7% | -2.8% | -13.7% | -1.3% |
| Global Renewable Energy | -2.9% | 10.2% | 10.5% | 8.5% | 2.3% | -4.0% | 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.