- In earlier Strategy notes, we wrote about balancing optimism with prudence. In January, we expected steady market progress, and this has largely come to pass. Markets have faced bouts of volatility, and we expect this pattern to continue too. Equities remain supported by strong earnings, healthy balance sheets, robust investment in US technology and higher European defence spending. Fixed income yields are also attractive and should support positive returns.
- Central banks face a difficult trade-off between above-target inflation and muted growth. The ECB, Fed and Bank of Japan have signalled or delivered further tightening, while the Bank of England remains cautious but could raise rates if oil prices keep inflation elevated. However, market expectations may be overstating the likely scale of increases. With energy driving inflation and wage pressures subdued, any near-term hikes may primarily protect central-bank credibility rather than materially reduce inflation.
- Today’s inflation pressure is primarily an energy shock, unlike 2022–23, when higher energy costs coincided with strong post-pandemic demand, broad price pressures, a tight labour market and rapid wage growth. Consumer demand and worker bargaining power are now weaker, while unemployment is higher, payrolls are falling and wage growth is slowing. However, prolonged high energy prices could embed inflation expectations.
- Fixed income: Fixed income yields continue to rise in the face of higher inflation and rising real yields. Whilst this has meant a muted return so far in 2026, we continue to believe there are good opportunities for future returns. This does not mean every part of the bond market is equally attractive, or that the path will be smooth, particularly as longer-dated government bonds remain sensitive to yield moves. 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 this year, supported by exceptionally strong corporate earnings. These earnings have brought headline valuations lower. AI investment remains an important driver, benefiting US, Asian and emerging-market technology companies. Earnings growth has broadened out across sectors and regions. Whilst corporate balance sheets remain healthy, higher interest rates do present greater refinancing risks. We retain meaningful equity exposure but remain cautious about areas of higher valuation, market concentration and, of course, geopolitical risks.
- Currency: The US dollar and Japanese yen both rose strongly through September, but there has been reasonable volatility in both this year. The euro has drifted lower more steadily.
- Commodities: Higher interest rates and a stronger dollar weighed on gold. It ended September at $4,161 per ounce, well below its January peak of around $5,500. Brent oil rose as Houthi attacks in Yemen disrupted transport routes and US–Iran tensions continued in the Strait of Hormuz. It ended September at $97 per barrel.
- Our portfolio strategy and key message remain the same. 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.
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