Global investment market review: Q2 2026

Heather Coulson, Head of Portfolio Management, discusses some of the key influences on markets in May.

Over the second quarter of 2026, the MSCI ACWI Index, a representative measure of global equities across developed and emerging markets, added 14.2% in sterling terms. Asia Pacific, emerging markets and the US equity markets led the way, with most other regions also performing robustly. Growth stocks were strongest as a group over the second quarter, but value-oriented stocks also made headway. Equity markets were positively influenced by an easing of tensions in the Middle East, notable strength in some AI capex-related stocks and improving corporate earnings growth estimates. In fixed income, the ICE BofA Global Government Index declined 0.5% in sterling terms but gained 0.7% in local terms. Sterling was broadly flat against the US dollar but rose against the euro.

Crude oil futures prices declined sharply as oil supplies started to improve through the Strait of Hormuz.

The FTSE 100 Index, a commonly used representative benchmark of the UK’s largest equities, moved 4.0% higher. Meanwhile, the FTSE All Share Index was up 4.7%, as mid-cap stocks outperformed larger names. The UK market trailed the rise in other markets as lack of exposure to technology stocks hindered the performance of the large caps. There was also some political uncertainty as Prime Minister Keir Starmer resigned. The Bank of England’s Monetary Policy Committee kept rates on hold over the period. In its June policy meeting, two of the nine rate-setters voted for an interest rate rise. Overall, there was some caution about the possibility of elevated inflation being persistent and spilling over to affect wages. However, over the course of June, the market started to anticipate fewer rate hikes over the coming year as energy prices retreated. Meanwhile, the UK’s annual inflation rate slowed to 2.8% in April and May, from 3.3% in March, in part due to the energy regulator’s price cap change in April. The UK manufacturing Purchasing Managers’ Index (PMI) remained in expansionary territory over the quarter, with the preliminary reading for June down slightly on the previous month’s figure. The UK services sector PMI dipped into contraction during the quarter and the preliminary reading for June showed a further weakening on soft new orders and exports. Note that a PMI reading over 50 indicates that the manufacturing or services sectors are likely to be expanding.

In US equities, the S&P 500 Index increased 14.4% in sterling terms. The Nasdaq Composite Index, which has a growth focus, rose 20.8%. US stocks benefited from strength in growth-oriented sectors. The Federal Reserve (Fed) held rates steady at its meetings in April and June. Minutes from the monetary policy meeting in April signalled the potential for a tighter policy stance if inflation was to persist. June was the first monetary policy meeting presided over by the new Chair Kevin Warsh, who flagged the Fed will no longer provide forward guidance on interest rates. Annual inflation stepped up to 4.2% by May, having been as low as 2.4% in February, as gasoline and fuel oil costs impacted the data series. Non-farm payrolls slowed over the quarter, with the June reading hitting 57K new hires, which was below expectations and down from the revised figure of 129K in May, as the hospitality and leisure segment weakened. The unemployment rate dipped from 4.3% in May to 4.2% in June. The US manufacturing PMI remained in expansionary territory over the quarter.

The Federal Reserve held rates steady at its meetings in April and June.”

The MSCI Europe ex UK Index gained 12.3% in sterling terms. The Netherlands, Spain, Switzerland and France were among the strongest markets in local currency terms. The European Central Bank (ECB) increased interest rates by 25 basis points (bps) in June as it looked to curb inflation. The ECB also nudged down its annual gross domestic product (GDP) growth forecasts for the euro area from 0.9% to 0.8% expansion for 2026. During the first quarter, GDP growth contracted by 0.2% on the previous quarter, with Ireland a notably weak component. On an annual basis, GDP growth to end-March softened to 0.3% year-on-year (y/y), from 1.2% in the previous reading. Following a rise in inflation over the first quarter, eurozone consumer prices continued to rise in the second quarter, with May’s reading coming in at 3.2%. Eurozone manufacturing PMI continued to expand but readings softened as the quarter progressed. Meanwhile, the services PMI remained in contractionary territory.

Japan’s equities, as measured by the MSCI Japan Index, added 13.5% in sterling terms and 16.7% in yen terms The yen weakened against both the US dollar and sterling over the second quarter, despite supportive currency-market intervention by Japan’s authorities at the end of April. Yen weakness continued to boost the country’s exporters. The Bank of Japan (BoJ) upped its key interest rate by 25 bps to 1.0%, as seven of the eight policymakers that voted opted for a hike, against a backdrop of further inflation risks. However, annual inflation was little changed over the quarter and remained below the central bank’s target level of 2%. The manufacturing PMI was in robust expansionary territory. Meanwhile, the services PMI recorded an expansion in June’s preliminary reading, rebounding from the cusp of contraction in May.

The MSCI Emerging Markets Index grew 23.3% in sterling terms. Korea, Taiwan and India were among the main gainers, while China and Brazil declined in local currency terms. Taiwan and Korea made strong gains and their main stock markets hit record highs helped by demand for semiconductor and other technology hardware companies. The Bank of Korea kept interest rates put at 2.5%, though the won weakened somewhat and inflation edged up to 3.1% by May, taking it further above the central bank’s 2% target level. The country’s annual GDP growth expanded 3.8% year-on-year in the first quarter, helped by private consumption and government funding. In India, the central bank kept rates at 5.25% as it balanced ongoing currency weakness, as well as both growth and inflation worries. The central bank trimmed its growth forecasts for the FY2026-2027 from 6.9%y/y to 6.6% y/y, though the country’s calendar first-quarter 2026 GDP grew 7.8% y/y. India’s inflation had stepped up from 0.25% in October 2025 and by May had hit 3.93%, its seventh successive month of acceleration, led in part by food inflation. Brazil’s weakness was due in part to softness in energy companies. Inflation rose for three readings in succession to reach 4.72% by period-end. Despite this rising inflationary pressure, the country’s central bank introduced two interest rate cuts during the quarter amid general economic uncertainty.

The MSCI AC Pacific ex Japan Index increased 26.0%. At the country level, Korea, Taiwan and India were among the main gainers, while China declined in local currency terms. China’s weakness was partly due to weakness in equity sectors such as automotives. China’s GDP growth improved to 5.0% y/y in the first quarter, coming in above market expectations for 4.8%, helped by exports. Industrial production posted a reading of 4.5% y/y in May, an improvement on the previous month and above market expectations. Exports came in with better-than-expected growth of 19.4% y/y in May amid potential ongoing stockpiling on worries about supply chains. Imports remained elevated, with growth of 27.4% y/y in May, helped by demand for semiconductors and hardware components. In Indonesia, rates increased in three increments over the quarter, jumping from 4.75% to 5.75%, to help support the rupiah and combat price rises. Australia’s benchmark interest rate was increased in the central bank’s third hike this year given inflation concerns. However, inflation softened somewhat, from 4.6% in March to hit 4.2% and 4.0% in April and May, respectively.

Asia Pacific, emerging markets and the US equity markets led the way, with most other regions also performing robustly.”

In the second quarter, fixed income market returns were mixed. The 10-year US Treasury yield moved up (prices fell) from 4.31% at the start of the quarter to 4.42% by end-June. There was a large yield spike in the middle of the period, as inflationary pressures influenced activity. However, hopes of a ceasefire in the Middle East and softening oil prices helped bring the yield down as the period progressed. The UK’s 10-year yield fell (prices rose) as weaker growth sentiment and falling inflation led to reduced expectations of rate hikes in the near term. Local elections led to volatility in the middle of the quarter, and political issues continued with the resignation of Keir Starmer in June. Japanese government bond yields rose against the backdrop of the central bank’s ongoing monetary policy normalisation. In credit, spreads narrowed in high yield and investment grade on reduced risk sentiment as softer inflation led to reduced expectations of central bank rate hikes in the coming months. Emerging market debt also gained ground helped by an easing of inflation worries.

The FTSE EPRA Nareit Developed Index, a measure of the performance of Real Estate Investment Trusts (REITs), increased 7.8% in sterling terms. Note that REITs tend to be sensitive to interest rate expectations. During the three months to end-May – the latest period with available figures – the MSCI UK Monthly Property Index was up 1.2%. The retail segment has been relatively solid in recent quarters, helped by increased footfall, reduced vacancy rates, and strength in retail parks and central London. Prime office space in key cities remains in short supply.

* All index data are shown in total return sterling, unless otherwise stated.
Source: FE Analytics