Ten Investment Convictions for H2 2026

An interim agreement between the US and Iran removes a key uncertainty for markets as we move into the second half of 2026. Normalising oil prices, inflation and bond yields should support equity markets. While above-target US inflation will remain a priority for the Federal Reserve, resilient global growth and supportive liquidity foster a positive environment for risk assets. However, we expect more volatility ahead, not least as the US midterm elections approach.

The macroeconomic and market conditions continue to support risk assets. We keep an overweight stance in global equities, expressed through emerging markets, where valuations are more attractive and the outlook for earnings is stronger than in developed markets. In developed markets, we see the most compelling opportunities in US small capitalisations. We continue to believe that China will benefit from a broadening of emerging markets’ performance in a post conflict world, and have extended our preference to the onshore market as well.

In sectors, we have adopted a more neutral outlook for technology. The sector remains supported by strong fundamentals, including robust earnings growth and sustained AI demand. However, we expect market performance to broaden, and now favour financials in the second half of the year.

In fixed income, we have raised exposure to global government bonds to neutral, locking-in high yields as inflationary pressures ease. Within developed sovereign bonds, we continue to see the most compelling opportunities in Gilts, as well as Australian bonds.

The US dollar should be supported by a stable Fed outlook and a resilient US economy, and we have moved to a neutral stance versus lower-yielding developed currencies such as the euro and the Swiss franc. We stay positive on higher-yielding currencies, including those in emerging markets. We prefer expressing these preferences against the Swiss franc or the euro.

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Post-Iran conflict: a stronger outlook for risk assets

June 29, 2026

Markets enter the second half of the year having digested conflict, an energy shock and inflation concerns. We remain positive on risk assets, but volatility will persist. Further inflationary pressures, a more restrictive Fed, geopolitical tensions, the US midterm elections and policy shocks such as tariffs, all demand vigilance.

1. Emerging markets’ revival

The Middle East conflict has taken a temporary toll on emerging market assets (bonds and some stocks) but has not altered their appeal. Lower valuations compared to developed market equities now offer a good entry point to benefit from superior earnings growth. Normalising oil flows from the Middle East and lower crude prices should help emerging market importers, especially in Asia. Our preferred equity markets remain South Korea, South Africa and China. Emerging market tech firms combine more attractive valuations with stronger earnings growth than their developed-market counterparts. Emerging market bonds continue to offer the strongest yield opportunities relative to credit quality in fixed income, while public debt ratios and external balances remain healthier than in developed markets. Emerging market currencies should also regain ground against the US dollar, which we expect to weaken now that geopolitical uncertainty in the Middle East has peaked.

2. Financials and selected cyclicals

With geopolitical risks receding, earnings prospects should broaden beyond the tech sector to a wider range of cyclical industries, many of which have borne the brunt of the energy shock. We favour financials for their solid earnings, attractive valuations, and strong capital returns. Higher current interest rates, contained credit risk, and stock buybacks support the case. Risks seem contained and would include a sharper slowdown or AI funding hitting credit quality, faster margin compression, and tighter regulation. In other sectors, we also like sub-segments such as luxury, with strong pricing power and margins, along with demand stabilising as China and tourism recover. Key risks are a weak rebound in China, currency headwinds, and softening demand from aspirational consumers.

Earnings prospects should broaden beyond the tech sector to a wider range of cyclical industries

3. China opportunities remain, now onshore as well

Chinese equity markets have trailed other emerging markets recently. However, we believe that post peak geopolitical uncertainty, a broader approach is warranted. We therefore now favour onshore equities alongside offshore markets. Onshore equities provide more direct exposure to AI infrastructure, semiconductor localisation and policy-driven investment, underpinning superior earnings growth, while offshore markets continue to offer more attractive valuations and potential upside from improving sentiment, accelerating cloud revenue growth and AI monetisation, as well as a recovery in consumer demand. Combined with strong policy support, a rapidly expanding AI ecosystem, robust export growth, and a shift in household wealth from property towards financial assets, we see a compelling case for a balanced allocation across both onshore and offshore Chinese equities.

4. Quality developed market equities with attractive dividends

Reinvesting dividends is one of the most reliable strategies for wealth preservation and growth in equity portfolios. Quality, dividend-paying companies in developed markets can offer attractive cash flows and lower stock price volatility than the broader market, as well as strong balance sheets. These companies span industries such as financials, energy, industrials, healthcare, consumer staples, utilities, and real estate. Such sectors can include some exposure to technology that helps to sustain dividend growth and reduce industry-specific risks. Quality dividend stocks can anchor portfolios in volatile periods, and help shield performance in times of uncertainty. Following the Iran-US deal, we expect yields to decline, which should act as a positive.

Quality dividend stocks can anchor portfolios in volatile periods

5. Small caps recovery

Developed market small-capitalisation equities recovered in the second half of 2025 thanks to easing monetary policy, improving earnings revisions, and capital expenditure. We see more upside potential due to attractive valuations, earnings growth and exposure to a potential manufacturing recovery. Small-caps have started the year well, but have paused since the start of the Middle East conflict due to their underexposure to the US tech sector. We expect outperformance to resume with the broadening of growth to cyclical sectors driven by accelerating and superior earnings growth at attractive valuations relative to mid and large caps. We also see tailwinds from AI-driven productivity gains, rising merger and acquisition activity, and any changes to US import tariffs. Historically, these stocks tend to lead in periods of profit recovery. Investor positioning is light, leaving room for more inflows to this segment. Catalysts would include a normalisation of benchmark yields, an improving manufacturing cycle and energy price normalisation.

6. High-yielding sovereign bonds

With corporate spreads – the yields corporates offer above sovereign bonds – at historically tight levels, select, high-yielding government bonds offer attractive risk-adjusted returns. Ten-year UK Gilts, our preferred exposure, have experienced some politically-driven volatility, but we continue to expect the Bank of England to cut policy rates in 2027 after keeping them on hold this year, leading to a fall in long-term yields, and attractive total return prospects for Gilts. We also like Australian government bonds: higher recent yields offer an attractive opportunity to enter this market. Current expected policy tightening appears disconnected from economic fundamentals; growth remains resilient while stronger productivity and cooler unit labour costs point to easing inflation without materially tighter policy.

…select, high-yielding government bonds offer attractive risk-adjusted return

7. Convertible bonds

Convertible bonds combine a bond with an equity call option, or the right to convert the debt into stock if the price rises significantly. The bond offers a downside cushion, and the equity element offers participation in rising equity markets. Convertible bonds thrive in environments that combine moderate economic growth with market volatility, providing diversification along with the ability to capture greater upside than downside risk. Global convertible bonds have significant exposure to the Asia-Pacific region and sectors like utilities, real estate, and materials. Today’s rising volatility boosts the value of equity call options, despite some rises in bond yields. Convertible bond issuer default rates fell in 2025, supported by lower interest rates. We continue to monitor any risks stemming from AI ripple effects for issuers of convertibles.

8. Swiss real estate

In Switzerland, real estate investments still offer an attractive alternative source of yield for Swiss franc-based investors. Our outlook for the Swiss National Bank remains for unchanged interest rates this year.

9. Hedge funds and private equity

To enhance diversification, investors should maintain exposure to hedge funds and private equity. Hedge fund strategies that focus on corporate activities, such as event-driven strategies, and equity market price dislocations, such as relative value/arbitrage strategies, can deliver returns irrespective of the direction of the broader equity market. Private equity can complement these exposures. Here we favour strategies that target mid-sized businesses at sensible valuations, using less leverage than mega-cap buyouts and making operational improvements to create value. Co-investments and secondary private equity deals can offer lower fees, greater flexibility, and better cash flow timing for investors. Together, these alternative investments can provide independent sources of return and resilience during periods of listed market volatility, with the aim of strengthening portfolio diversification.

…alternative investments can provide independent sources of return and resilience…

10. FX with clear domestic catalysts, funding by low yielders

We continue to favour undervalued currencies with positive catalysts. However, with the US dollar likely to be better supported against lower-yielding currencies, we favour expressing this view against both the Swiss franc and the euro. In developed markets, we continue to favour the Australian dollar (AUD), which benefits from supportive terms of trade and attractive interest rate differentials. We believe the Chinese yuan (CNY) will continue to strengthen moderately, backed by a large trade surplus and a rising official preference for continued currency appreciation. Elsewhere in emerging markets we continue to like the South African rand (ZAR) and the Brazilian real (BRL). The latter could face near-term volatility as October elections approach, but retains a valuation and interest rate differential cushion. Finally, the Hungarian forint has performed well on positive political developments, which could lead to better macroeconomic outcomes.