- In January, we titled our outlook “A Year for Prudent Optimism”, expecting portfolios to make steady progress. Optimism was grounded in robust investment in US tech and increased military spending in Europe. Looking ahead to the second half, that view still feels broadly right, though now we’re putting more weight on the “prudent” than on the “optimism.”
- The second quarter saw some market recovery from the challenging markets that ended the first quarter. This recovery was driven by robust earnings in AI and energy companies. Tech firms in particular saw a supercharged spike in profits, while energy companies benefited from rising prices after a drop in Gulf supply.
- Central banks are entering another awkward waiting game. The easing of restrictions through the Strait of Hormuz should help lower oil and gas prices, particularly for Asia and emerging markets, but the inflationary consequences will not disappear immediately. Food prices and delayed energy effects (especially in the UK) will likely keep inflation above target for longer. However, we do not believe they will rise enough to force the Bank of England to raise rates.
- In the US, new Fed Chair Warsh appears keen to simplify communication and ultimately cut rates. Strong inflation and resilient employment suggest patience is required. The ECB’s latest rate rise looks more like an attempt to reassert credibility than a clearly necessary policy move, while the Bank of Japan’s tightening seems better aligned with domestic conditions. Overall, central banks are moving in different directions, with caution still a dominant theme.
- Fixed income: Fixed income continues to deliver higher starting yields, meaning bonds once again have the potential to provide income, diversification and a degree of ballast if markets become more unsettled. That does not mean every part of the bond market is equally attractive, or that the path will be smooth. We remain focused on good-quality areas, shorter-dated opportunities and a selective approach to credit risk.
- Equities: Equity markets have continued to make progress, bolstered by strong earnings in parts of the technology sector and renewed excitement around AI. There are good reasons for that enthusiasm, but valuations still leave less room for disappointment in some of the most popular areas. We are therefore happy to keep meaningful equity exposure where it is appropriate for each portfolio, but we continue to prefer balance over bravado. Diversification across regions, sectors and investment styles remains important, particularly with markets increasingly concentrated.
- Currency: The US dollar did strengthen toward the end of Q2. However, on a year-to-date basis there were only minor moves (a few percentage points) among the major currencies.
- Commodity: Gold continues to drift lower. It remains well below its previous peak of c$5,500 per ounce and even ended June at c$4,000 per ounce, well below its January starting price. Meanwhile, Brent oil remains susceptible to news headlines but has fallen from the highs around $115 to just above $70/barrel by the end of the quarter.
- Our portfolio strategy is unchanged. We aim to capture the attractive income now available from bonds, hold equities to benefit from long-term growth, and maintain enough discipline to avoid chasing every passing theme.
