Global investment market outlook: Q2 2026

Though we manage funds for the long term, here are our thoughts on markets as we look forward over the coming quarters.

Despite the pullback in March because of the conflict in Iran, we believe equities remain relatively fully valued. In our view, volatility could continue, and uncertainty about the direction of interest rates could still favour value sectors and companies with robust balance sheets. We believe in having a geographical spread of equity market exposure, while continuing to monitor risks, such as the impact of trade tariffs, market concentration and geopolitical conflicts.

In fixed income, inflation risk has returned which may limit the upside for government bonds over the coming quarters. Despite the recent widening of spreads, credit is relatively fully valued, though opportunities in high yield could appear. We believe in holding a diversified blend of government bonds and credit, in different geographies and with different characteristics, and which can continue to provide income-generation benefits.

UK inflation was already relatively elevated compared with peers, but the airstrikes on Iran have increased the chances of price rises and rate hikes. UK equities have performed well over the quarter, helped by the market’s value skew. However, despite low economic growth, we are relatively constructive on the UK market’s defensive skew and limited technology sector exposure.

The relatively elevated US valuations have lessened somewhat as AI capital expenditure worries affected some of the larger stocks, while the potential for AI to disrupt business models hit the software segment in the first quarter. Sector leadership may continue to evolve if the war and its inflationary impacts continue. Over the longer term, we believe US economic growth prospects are better than many other developed markets.

Economic growth may remain lacklustre, and the European Central Bank could be forced to start raising interest rates given rising inflation expectations. Fiscal spending and capital investment plans along with attractive valuation levels could continue to help the region’s equities in the coming quarters.

We believe in having a geographical spread of equity market exposure, while continuing to monitor risks.

Japan’s stocks have benefited from positivity around its recent election and longer-term structural reforms, but valuation levels are now relatively full.

Emerging market valuations still appear relatively attractive, despite the performance improvements in recent quarters. However, further US dollar strength could prove a headwind. In our view, emerging markets still represent an important long-term growth opportunity.

Ahead of the outbreak of conflict in the Middle East, we believed we were nearing the bottom of the interest rate cycle. And despite the spike in energy prices, the US closed the first quarter with central bank policymakers still expecting one more cut this year. In our view, the return of inflation risks on the back of the oil price shock has now increased the chances of rate hikes in the US, UK and Europe. Government debt levels in developed markets will remain an important focus for investors and limits the ability of many developed markets to soften the impact of any inflationary pain. We remain positive on the asset class. As we believe the recent impact of inflation could be short lived, we prefer longer-term government bonds.

We are relatively constructive on the UK market’s defensive skew.

Credit spreads have widened somewhat but still remain relatively tight in both high yield and investment grade bond markets. However, we continue to believe that volatility could open up opportunities in credit, particularly in high yield.

We monitor for idiosyncratic risk on an ongoing basis. However, over the past few years, several emerging economies have benefited from fiscal pragmatism. If US-dollar strength continues it could limit near-term potential, but recent events have helped improve already relatively attractive valuations.