2026 Half Year Update

The first half of 2026 was dominated by geopolitical tensions in the Middle East, culminating in US and Israeli strikes on Iran and its regional proxies. Financial markets were particularly sensitive to the impact on global energy supplies, with oil prices rising sharply amid supply disruptions. Higher energy costs added to inflation concerns, prompting some central banks to raise interest rates.

Equity markets initially responded negatively. By the end of March, the S&P 500 Index had fallen more than 7% year-to-date, while most major developed-market indices were also in negative territory.

However, sentiment improved markedly during the second quarter and equity markets recovered those losses, with most ending the first half of the year in positive territory. As concerns over a broader regional conflict eased, investor focus shifted back to underlying fundamentals, including continued strength in AI-related investment, a robust corporate earnings season and signs of diplomatic progress between the US and Iran.

With the first half of the year now behind us, it’s an opportune time to reflect on the key developments and themes that have shaped the period and consider the factors likely to influence the months ahead.

The first half of the year was a perfect example of the importance of staying invested. While events such as the Middle East conflict are impossible to predict, history has consistently shown that financial markets are resilient, particularly over the long term.

For example, at a diversified level, all our funds and strategies, excluding our Cash Fund, delivered negative returns over the first quarter. However, as markets rallied, so did performance.

For the six months ending June, all our diversified funds and strategies were higher, with the High Growth Fund returning nearly 20%, while our Conservative Fund was up more than 5%.

Performance during the first half of the year was also supported by strategic changes made to our portfolio in late 2025. We streamlined our international equity manager lineup, terminating two mandates and reallocating capital to higher-conviction strategies. In addition, we consolidated our emerging markets exposure with two active managers: RBC BlueBay and Lazard.

While still early, the benefits of this more selective active management approach are emerging. Our international emerging markets allocation delivered strong returns over the period, with both managers delivering double-digit returns in the first six months of the year. This reinforces our view that active management can add meaningful value, particularly in less efficient markets such as emerging economies.

Within developed market equities, our complementary line-up of managers has also helped make portfolios more resilient and performance more consistent.

At a tactical level, our investment team actively responded to evolving market conditions, which also contributed positively to performance.

During the first half of the year, we moved overweight in US equities relative to Europe. At the time, the strength of the US economy and robust earnings outlook pointed to greater upside potential, while European markets faced increased exposure to rising energy prices. This positioning proved beneficial, and we exited the trade profitably.

In fixed income, we established an overweight position in US and UK government bonds. More recently, bond yields have moved modestly higher in July, creating some short-term price headwinds, but yields remain attractive from a medium-term investment perspective.

In the past few weeks, we have moved to an overweight position to the New Zealand dollar against the Australian dollar, reflecting our view of diverging monetary policy and housing market trends. Australia’s rate-hiking cycle appears near completion, while New Zealand is only beginning to tighten policy. At the same time, Australia's housing market is weakening, whereas New Zealand’s market is showing signs of recovery.

Geopolitical uncertainty in the Middle East is likely to remain a key driver of financial markets through the second half of the year. Following a period of de-escalation earlier in the year, tensions have resurfaced in late July with renewed military strikes, increasing uncertainty around inflation and economic growth. Oil prices, which had fallen sharply in June, rose in response to the renewed tensions.

The situation remains fluid and is likely to be for some time. As a result, further periods of market volatility cannot be ruled out.