Commentary for August 2026

Market Overview

Global markets delivered strong returns while bond markets closed broadly flat, as investors weighed robust corporate earnings and resilient economic activity against the inflationary consequences of continued uncertainty in the Middle East. Overall, equities closed 1.8% higher. Japan was the strongest performing region, returning 2.7%, as a weaker yen supported its export-led companies and domestic economic data improved. Emerging markets and Asia rose by 2.6% and 2.5%, respectively. The US market continued to benefit from strong corporate earnings, rising 2.0%. Energy, materials and technology were the strongest sectors, while utilities and financials lagged. Elsewhere, Europe rose 0.8%. The UK was broadly flat, although UK smaller companies jumped 4.2%. 

Geopolitics continued to dominate headlines, with hopes of a durable resolution to the conflict in the Middle East ebbing and the US and Canada engaged in a tit-for-tat trade tariff escalation. Tensions flared when the failure to reach a trade agreement triggered fresh US tariffs and retaliatory Canadian measures, reigniting concerns over global trade friction and supply chain costs.

While equity markets have continued to perform well, government bonds have sold off as yields have moved higher, in some cases reaching levels not seen for many years. There are good reasons behind both moves. We are seeing some of the best corporate earnings growth in a number of years, as enthusiasm around AI continues to filter down to other sectors involved in the supply chain. In bond markets, however, investors are contending with persistent inflationary risks with the oil price back at $90, along with a substantial increase in the supply of debt. Government borrowing remains high across developed economies, with news that US government debt has exceeded $40 trillion highlighting why fiscal sustainability has become an increasingly important market theme. Large technology companies are also becoming significant bond issuers as they finance the enormous spending associated with AI.

The yield on the 10-year US Treasury bond topped 4.75%. Treasury Secretary Scott Bessent moved to dampen the rise by announcing that the US government would double its purchase of long-term US bonds. The timing of the move suggests that the Trump administration is feeling the pressure on rates ahead of the mid-term elections in November. Treasuries rallied sharply, but much of the move was quickly reversed. Persistent inflation, resilient growth and large fiscal deficits are difficult to wish away without accompanying policy action to cut the level of debt. This has not been forthcoming. Markets interpreted the move as a willingness to print more money. The US dollar sold off while the price of gold moved sharply higher, closing up 8.5%.

Data in the US was strong. The economy added 162,000 jobs in August, exceeding expectations of 53,000, while unemployment held steady at 4.1%. Headline CPI rose 3.4%, with the energy component up 16.3% over the year. For investors, this is both good and bad news. Continued employment growth supports consumer spending and company revenues. It also makes the Federal Reserve’s inflation problem harder to resolve. Fed Chair Kevin Warsh, speaking at the annual central bank’s Jackson Hole Symposium, signalled an increased likelihood of rate hikes aimed at curbing US inflation.

UK inflation was also back above 3% in August. The economy surprised on the upside, with unexpected growth in July and signs that productivity is beginning to improve, perhaps as the benefits of AI begin to show up. GDP rose by 0.4%, up from 0.3% in June and zero growth in May. The figures show that households and businesses are still spending despite the impact of higher energy costs. The latest forecasts by the IMF predict that the UK economy will grow by 1% in 2026 and 1.3% in 2027. However, uncertainty around the contents of the Autumn Budget remains a risk in the short term.

 

 

Looking Forward

Investors following the adage to sell in May and return on St Leger Day have missed out on some stellar returns over the summer. Despite the doom and gloom globally surrounding geopolitics, inflation and the potential for higher rates, most equity markets have made mid-to-high single digit returns over the past few months.

Economic growth has remained resilient, reducing the risk of a near-term earnings downturn. Meanwhile, bond yields have continued to drift higher on the back of legitimate fiscal and inflationary concerns. The period of monetary easing is on pause for now, with the balance of risk having shifted to the upside.

Rising rates are not necessarily bad news for equities, so long as they’re accompanied by a corresponding move up in profits as a result of economic strength. It’s during a rate-cutting cycle, often as the economy is tipping into recession, when the damage can be done. Bull markets usually end when earnings roll over, which is not the case at present. That said, a gradual and orderly rise is clearly preferable to a sharper repricing.

In fact, the case for a boom in the US economy is growing stronger. The capex cycle is extremely strong, manufacturing activity is accelerating, and bank lending growth is robust and trending higher. Policy will clearly need to tighten should this continue. While technology is still a major driving force, AI spending is spreading to other sectors and regions, while investment in energy, infrastructure and defence is also rising. These effects have boosted the growth prospects of many much cheaper ‘old economy’ industries that have been neglected for many years by investors seeking growth. The AI trade may yet turn earnings growth into a story bigger than the technology itself.

Since 2025, as the opportunity set has widened, the US has been the weakest of the major regions, with the strongest being Japan, Asia and emerging markets. Despite above-average gains, equity markets have become cheaper in valuation terms, as the rate of increase in earnings has outpaced the rate of increase in share prices. Second quarter global profits grew roughly 33%, one of the steepest upward revision periods in decades.  This is an important change from previous periods of strength, where much of the return was driven by rising valuations amid the support of lower interest rates.

The UK economy has proved far more resilient than many feared in early 2026. Meanwhile, the FTSE 100 is closing in on the 11,000 level and is also now ahead of the S&P500 over the past year. The takeover of UK listed companies shows no signs of slowing, having surpassed $100 billion so far this year, up from $40 billion for the whole of 2025. International buyers, private equity groups and company managements recognise what public markets are overlooking: there are many high-quality global franchises trading at unjustifiably low valuations.

The gold price is showing signs of resuming its uptrend, having pulled back after strong gains in 2025. Gold miners look particularly interesting, trading at a lower valuation than in 2018 despite generating an unprecedented level of free cashflow. Relative to the overall market, valuations are also among the cheapest on record.

 

Our Strategy

Against this backdrop, the outlook for equities remains constructive, albeit with a wider range of potential outcomes. Our portfolios remain overweight equities and have continued to benefit strongly from market strength. Our portfolios have also been adapted to navigate the potential for higher inflation and interest rates.

Looking ahead, markets are likely to remain sensitive to both energy-driven inflation risks and the sustainability of AI-related earnings. These risks call for different diversifiers within a portfolio. We favour regions outside of the US with cheaper valuations, including Japan, Asia and emerging markets, along with the UK. In contrast we are underweight fixed income given the headwinds of elevated inflation and deteriorating fiscal positions of governments across the West. Having said this, bonds are starting to offer value at today’s higher yields and can provide meaningful income and protection when economic growth weakens. We are watching this space carefully but continue to favour shorter duration and index-linked bonds for now.

Real assets remain an important diversifier amid elevated inflation and geopolitical uncertainty. Our standard client portfolios continue to own gold, commodities and infrastructure, where return drivers differ from conventional equity and bond portfolios. 

Despite different commodities leading at different times, overall, the asset class has shone. Over the past five years the sector has been the top performer, beating technology by 12 percentage points. Gold has been the early leader, but other areas have taken up the running this year.

UK equities offer genuine diversification because of their unique sector make-up. The market is home to many world class companies that trade at a meaningful valuation discount to international peers. Earnings are forecast to grow at a respectable 19% in 2026 while M&A activity has continued to rise.

Emerging markets also trade at a significant discount to developed market peers, despite having the strongest outlook for earnings growth. Our core emerging markets fund, managed by Artemis, is trading on a multiple of just 7 times earnings. We expect this valuation gap to narrow over time as investors recognise the supportive structural trends that are in place and as they feed through to corporate performance. Emerging market equity funds have attracted nearly $7 billion of net inflows in the first half of 2026, the strongest period on record and a sharp reversal from 2025’s outflows.

Overall, we continue to manage investments in a manner that allows us to capture the upside in financial markets while also effectively controlling risk to dampen volatility and smooth the path of returns.