Q2 2026 Investment Commentary

Welcome to our latest investment commentary. Last night’s nail-biting semi-final was a reminder that, whatever the predictions – and however much we hope for a particular outcome – things do not always go as expected. Markets can be much the same.

 

Beyond the excitement on the pitch, this year’s World Cup is also expected to generate significant economic activity. FIFA estimates that the tournament could contribute around $40.9 billion to global GDP, driven by increased spending across travel, hospitality, media, entertainment and consumer goods. It is a reminder of just how interconnected the global economy has become and how events can have far-reaching effects.

 

In this edition of our investment commentary, we will cover the second quarter of 2026 and the outlook for the remainder of the year.

Q2 REVIEW

The last quarter was shaped by geopolitics and semiconductors.

The anticipated short-lived war continued for much longer than expected, and markets were constantly reassessing when the conflict might end and what its impact would be on short-term inflation relative to longer-term economic effects. During the relief rally, markets became extremely concentrated in semiconductor stocks, creating the impression that headline indices were performing strongly, despite only a handful of companies driving returns. Portfolio performance strengthened towards the end of the quarter as market momentum began to broaden beyond the semiconductor sector. While our underweight position in semiconductors meant that returns initially trailed the wider indices, the shift in market leadership towards the end of the quarter helped improve relative performance.

During the quarter, we also saw Iran use its key point of leverage, the Strait of Hormuz. The Strait was declared open, then closed, then reopened, and closed again several times. Iran introduced a tolling system to control shipping through the Strait. US and US allied vessels were prevented from passing, neutral countries were charged $2m per ship, while Iranian and allied vessels could pass freely. This arrangement was not sustainable and increased pressure on Western economies through higher oil prices. This left the US with little choice but to respond in the Strait of Hormuz. As a result, it imposed a blockade intended to force Iran to reopen the Strait to all shipping by preventing any vessels from passing. Iran needed access to the waterway to continue exporting oil and funding its war efforts. The situation became a contest over who could more effectively close the Strait of Hormuz, while Trump escalated tensions further by threatening to end Iranian civilisation. However, once again, following his characteristically aggressive rhetoric, Trump ultimately delivered what many have described as a TACO outcome.

Trump travelled to China to meet President Xi after postponing the visit earlier in the year because of the war. A ceasefire with Iran was agreed beforehand, placing the US in a stronger negotiating position ahead of discussions with China. During the US blockade, the limited number of ships permitted to pass through the Strait were primarily destined for China in an effort to maintain positive relations with Xi. China’s exposure to disruption in the Strait is relatively limited, with only 6.6% of its total energy consumption passing through the waterway. In addition, the renewed focus on energy self reliance, prompted by what is becoming the second major oil supply shock in four years, places China in a relatively strong position. The country controls the majority of the world’s rare earths and critical minerals. There has also been renewed investment in renewable energy, an area where China remains the global leader. China accounts for roughly 50% of global solar power, 40% of global wind power, and approximately 85% of global solar panel production. Despite these strong structural advantages, Chinese equities have underperformed broader Asian markets over the past two quarters.

Semiconductor stocks dominated market performance during the quarter, producing one of the most concentrated rallies seen in many years. We observed a significant disconnect between bond markets, which continued pricing inflation risks, and equity markets, which appeared to be pricing near perfect outcomes for AI hardware companies. Semiconductor companies, particularly memory chip manufacturers, experienced parabolic gains as supply bottlenecks emerged. AI hyperscalers were prepared to pay substantial premiums to secure critical components required for AI infrastructure expansion. As a result, a significant share of profits shifted from AI hyperscalers towards semiconductor manufacturers. Consequently, almost every major semiconductor company doubled in value during the quarter. These were not small companies experiencing speculative rallies but some of the world’s largest businesses adding enormous amounts of market capitalisation in a very short period, which is highly unusual. At the same time, traditional AI hyperscalers, including the Magnificent 7, lagged the broader market, suggesting a shift in AI leadership.

Much of this rally appeared to be driven by retail investors, who typically place less emphasis on valuations and fundamentals. Citadel Securities recently reported that retail equity trading volumes more than doubled their 2024 average. The firm also noted that nine of the ten busiest retail trading days it has ever recorded occurred within the past two months. Retail investor purchases have been running at almost four times last year’s average. Moves driven by momentum can be powerful, but history has shown they can also reverse quickly. The recent five standard deviation move serves as a reminder that periods of market concentration rarely continue indefinitely.

To help navigate these environments, our core portfolios include the hedge fund Invenomic, which incorporates a short momentum strategy designed to provide protection when market leadership changes sharply. Whilst this positioning has been a headwind during the strong momentum rally this year, we continue to believe it plays an important role in building resilient portfolios. Encouragingly, when momentum has reversed abruptly, Invenomic has demonstrated its ability to respond quickly, generating single-day gains of more than 5%.

Towards the end of the quarter, following 107 days of conflict, a peace agreement was reached between the US and Iran. The agreement stated that Iran would reopen the Strait of Hormuz, the US blockade would be lifted, and further negotiations would take place regarding Iran’s nuclear programme. Markets responded positively, with oil prices falling below their pre war levels, which aligned with Trump’s objective. However, the agreement remained fragile because of continuing uncertainty surrounding Iran’s nuclear programme, which the US had cited as the primary justification for its initial military action. Further uncertainty arose after Iranian state media claimed that the US had agreed to provide $300 billion in reconstruction funding alongside $24bn of previously frozen assets, directly contradicting Trump’s public statements that no funds would be transferred to Iran. Netanyahu also rejected the Lebanon clause, stating that Israel did not consider itself bound by the agreement. Trump further stated that the Strait would become toll free, while Iran’s Fars news agency maintained that Iran, alongside Oman, would continue regulating access to the Strait.

The quarter also saw significant developments in the IPO market, with several large private companies, including Anthropic, OpenAI and SpaceX, reportedly seeking public listings. SpaceX was the first to proceed and completed what was the largest IPO on record, with a valuation of $1.77 trillion despite reporting a $4.9bn loss in the previous year. The IPO raised $86bn in equity capital, followed shortly afterwards by a further $25bn in the debt market through the company’s first corporate bond issuance. This significant capital raise is likely to support SpaceX’s AI ambitions following its acquisition of xAI, another of Elon Musk’s companies. AI businesses require substantial ongoing investment, and this funding provides xAI with the financial resources needed to continue investing heavily in Nvidia GPUs, AI data centres, model development and the training of Grok.

2026 OUTLOOK

Geopolitics

The fragile peace agreement between the US and Iran has recently broken down, with Trump stating that the US blockade will return alongside a 20% charge on cargo values, while both sides have resumed strikes on military targets. We believe this may form part of Trump’s negotiating strategy by allowing the situation to deteriorate before presenting a compromise as a political victory. A 20% charge on cargo values would be highly significant, and it is possible that Iran ultimately operates a tolling system through the Strait at a much lower level, closer to the previous charge of around $1 per barrel of oil. Such an outcome would allow Trump to claim success while easing tensions. Within portfolios, we continue to limit oil exposure, as it can introduce significant short term volatility and the outlook remains extremely difficult to assess.

We continue to believe Trump is directly incentivised to bring this conflict to an end and, in reality, accept a compromise while presenting it as a victory. With the US midterm elections approaching, bringing inflation lower remains a key priority. It appears unlikely that the Strait will return to its pre-war status quo, but the US may ultimately need to accept that some form of tolling system will remain in place.

UK

The FTSE 100 lagged during the quarter as energy stocks weakened following the 15% decline in oil prices. In contrast, the FTSE 250 outperformed, supported by its greater exposure to domestically focused companies, which benefited as inflation expectations eased.

The main focus has been on the gilt market, which experienced volatility during the conflict because of the UK’s dependence on imported energy and continued political uncertainty surrounding government leadership. Despite this, gilts rallied strongly following the peace agreement and ultimately finished the quarter in positive territory. We used this strength as an opportunity to reduce our gilt exposure, as recession risks appeared to diminish and the potential for gilts to provide downside protection became less compelling.

USA

The new Federal Reserve Chair, Kevin Warsh, has a significant challenge ahead. His first FOMC meeting concluded with interest rates remaining unchanged. Markets are now pricing in the possibility of a rate increase later this year as inflation expectations have risen, representing a notable shift from the rate cuts that were being priced earlier in the year. Warsh faces a difficult balancing act. There are increasing questions surrounding Federal Reserve independence, meaning he cannot be perceived as simply implementing Trump’s preferred policy. At the same time, raising interest rates could unsettle financial markets, while inflation continues to rise, with US CPI now at 4.2%, well above the Federal Reserve’s 2% target.

Interest rates often prove sticky on the way up. Following the three rate cuts delivered last year, some of that earlier insurance may now need to be reversed if economic data continues to outperform expectations. More recently, a weaker than expected US employment report reduced expectations of higher interest rates, although those expectations strengthened again following the renewed escalation in the conflict.

The Magnificent 7 have underperformed recently, but despite this weakness, earnings optimism across US equities remains exceptionally strong, with long term earnings growth expectations reaching very elevated levels. The risk is that earnings forecasts have become too optimistic, leaving valuations increasingly stretched. In addition, foreign investment into US equities remains at record levels as global investors continue seeking exposure to the market and are reluctant to miss further gains.

Asia

China has remained an overweight position within our portfolios, reflecting our conviction in the long-term opportunities available in the region. In recent quarters, however, market performance has been dominated by a narrow group of semiconductor-related companies, which has overshadowed many other areas of the market.

Following China’s strong performance last year, some investors have taken profits and reallocated capital to markets such as South Korea and Taiwan, where companies including Samsung, SK Hynix and TSMC have been among the principal beneficiaries of the AI-driven semiconductor rally. As a result, capital has become increasingly concentrated in this part of the market, leaving other regions, including China, relatively overlooked.

China does have exposure to semiconductors, although it limits exports t

o prioritise domestic supply. The country remains a global leader across several advanced technologies, including EVs and robotics, and we continue to view it as an attractive long term holding within the portfolio. Chinese equities remain inexpensive relative to US technology companies while offering what we believe is a more attractive long term risk reward opportunity, supporting our overweight position.

We previously held an underweight position in Japanese equities because of their correlation with momentum driven regions such as the US, India and Taiwan. More recently, that relationship appears to have weakened, while the longer term investment case for Japanese corporate governance reform remains compelling. During the quarter, we increased our allocation to Japanese small caps through a fund focused on small cap growth companies. Much of Japan’s recent market performance has been driven by large cap value stocks, leaving smaller growth companies behind. We believe there is scope for a catch up as corporate governance reforms gradually filter through to smaller companies and excess corporate cash balances are increasingly deployed to support growth.

Strategy

Some points to note around our thinking moving forwards, which generally follow the comments in our previous updates:

• We remain underweight US equities. While the US continues to be at the centre of geopolitical tensions, earnings remain resilient. However, the concentration of global capital within US markets and the risks facing large technology companies continue to present challenges. We have added a 130/30 long short fund to help take advantage of periods of elevated short term market volatility.
• Although our largest regional equity allocation remains in the US, our overall positioning is overweight outside the US. We continue to hold overweight positions in the UK, Europe and Asia.
• Government bond yields were volatile during the quarter. Yields moved higher as rising inflation raised doubts over the pace of future interest rate cuts by major central banks, driven in part by higher oil prices. We used this as an opportunity to reduce our government bond exposure in favour of cash, which carries no duration risk.
• Credit spreads had tightened to historically low levels before the conflict but have since widened as the risk of defaults increased alongside higher oil prices and expectations that interest rates will remain higher for longer. We significantly reduced credit exposure over the past year, limiting the impact of this move. Should credit spreads continue to widen, we would look to increase exposure to high yield opportunities.
• The significant sell off in precious metals miners provided an opportunity to increase the position that we trimmed last year. Our conviction in the sector remains strong, and our patient approach has enabled us to add to our holding at what we believe are attractive valuations.
• Our UK exposure remains focused primarily on the FTSE 100, which includes large energy companies that can provide a degree of protection during periods of heightened Middle East tensions. This is complemented by an actively managed UK small cap fund that seeks to capture niche investment opportunities and enhance long term returns.
• We continue to hold a meaningful allocation to Asian equities, where valuations remain attractive. While many Asian economies are reliant on Middle East oil imports and have experienced some short term weakness, our longer term conviction remains intact as we believe the region continues to offer compelling structural growth opportunities.

Summary

We delivered another quarter of strong absolute performance. Our portfolios have limited exposure to semiconductor companies because we believe the high levels of speculation and strong retail driven momentum introduce additional risks. Encouragingly, we saw a reversal in this trend towards the end of the quarter, which has continued in recent weeks, with our portfolios benefiting as capital has rotated away from semiconductors and back towards value and other themes that performed well last year. We believe the portfolios are well positioned following the changes we have made.

We will continue to seek new opportunities across our portfolios while navigating the current market environment as effectively as possible.

CHANGES MADE

We made several changes during the quarter. A full summary of these changes is provided below. Some of the changes referred to in our outlook were implemented at the very beginning of Q3 and therefore are not included in the table below.

MARKET INSIGHTS WEBINAR

 

 

If you missed our Market Insights webinar earlier in the month, or you would like to rewatch it, you can do so here.

 

 

We hope you find this review informative and, as always, welcome any questions you may have.

 

 

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