Navigating Shifting Sands – Tracing the Fault Lines of H2 2026

Global equities have delivered returns in excess of 10% year to date – a performance that, on the surface, belies the considerable headwinds markets have absorbed. Geopolitical tensions in the Middle East, elevated oil prices, rising bond yields and a strengthening US dollar (USD) have all, at various points, threatened to derail the rally. Yet a combination of artificial intelligence-driven optimism and sustained corporate earnings growth has proven more than sufficient to maintain upward momentum through H1 2026.

The question now confronting investors is not whether the bull case remains intact – in our view, it does – but whether the conditions that made H1 relatively straightforward will persist into H2 2026. In our view, H2 presents a more complex operating environment, one defined by four structural pivot points that will separate disciplined, forward-looking investors from those who mistake recent momentum for a guarantee of future returns.

Hormuz – a permanent respite or a fleeting relief?

The shifting sands are most visible in the volatile energy markets, which remain the most immediate variable. The recent US-Iran interim agreement has introduced a degree of welcome relief, with the prospective reopening of the Strait of Hormuz expected to gradually unlock oil and gas supply. However, it is prudent to temper expectations. The agreement remains interim for now, and the physical resumption of oil and gas supply – constrained by damaged infrastructure and logistical complexities – will unfold over several weeks, with certain facilities potentially requiring years to return to full capacity. Simultaneously, many nations will seek to rebuild depleted strategic reserves, sustaining demand-side pressure. The net effect is a softening of energy prices, but not a return to pre-crisis levels.

Positioning, policy and the path ahead

Beyond the energy landscape, equity supply dynamics present a second, arguably underappreciated risk. A substantial US initial public offering (IPO) pipeline raises the prospect of short-term oversupply and, more structurally, a potential reversal of the long-running trend of declining equity floats – a trend that has quietly underpinned price appreciation for years. While the orderly completion of at least one significant IPO sets an encouraging precedent – and robust pipelines historically have not impeded performance in major non-US markets – the risk of a near-term supply glut remains real. The sheer scale of the upcoming IPO pipeline could easily trigger a temporary liquidity crunch, warranting close monitoring in the months ahead.

The shifting supply-demand dynamic directly intersects with investor positioning, which constitutes the third area of vulnerability. As we enter H2, a relatively optimistic sentiment is making markets susceptible to a near-term pullback. This is not, in itself, a reason to reduce equity exposure. Short-term models and reversal indicators remain constructive, and any temporary weakness should be viewed as an opportunity to add positions at more attractive levels. What it does demand, however, is discipline and a willingness to act counter-cyclically rather than follow the crowd.

The final piece of the H2 puzzle rests with monetary authorities. Central bank policy remains a source of meaningful uncertainty. Easing energy prices should alleviate pressure on most central banks to tighten further, offering a positive backdrop for risky assets. However, some central banks, such as the US Federal Reserve, will have to balance this with the risk of continued strength in the US labor market. On balance, we expect policy to remain sufficiently supportive to avoid a significant rise in bond yields, but it is quite likely that worries about inflation and the risk of higher bond yields will surface from time to time.

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Positioning for structural rewards

Against the current backdrop of complex macro transitions, we are of the view that the investment case remains constructive in H2 2026. We remain Overweight global equities, with the US market remaining preferred. However, broadening exposure beyond narrow pockets, such as semiconductors, remains key to the sustainability of the rally. We also raise Asia ex-Japan (AxJ) to Overweight – with India, China and Taiwan representing the primary regional market convictions – given the region’s equities should benefit disproportionately from a moderation in oil price risk.

Within bonds, we see an attractive opportunity to lock in a yield at current levels. In our view, the US 10-year yield should ease modestly into the 4.25-4.50% range over the next twelve months. Emerging market (EM) USD-denominated government bonds remain a preferred fixed income asset class, offering attractive yields, relatively limited commodity price sensitivity and the absence of direct EM currency risk.

We also retain an Overweight view on gold. Long-term diversification demand from emerging market central banks remains structurally intact, in our view, and gold continues to serve as an effective hedge against tail risks such as stagflation.

The transition from H1 to H2 2026 marks the end of a period where investors could easily traverse a rocky landscape. They must now balance the relief from the US-Iran interim deal against shifting sands across energy price, equity supply and central bank policy, as well as an over-optimistic market sentiment. True discipline – whether unlocking value in broader equity pockets such as AxJ or hedging with gold – is what will separate those who merely coasted on H1’s momentum from those who will successfully navigate H2’s shifting terrain and capture its structural rewards.

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