Market Perspectives July 2026

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The outlook for interest rates

Bonds end the quarter slightly up, despite considerable volatility.

Bond markets endured a torrid time during the last quarter as the closure of the Strait of Hormuz caused an inflation scare and meant that the prospect of interest rate cuts evaporated; investors began to fear imminent hikes instead. Added to that was the uncertainty about how hawkish or dovish the new chairman of the US Federal Reserve would be, and ongoing political risk in the United Kingdom. May saw multi-year highs in bond yields and there were fears that serious shortages across a broad range of commodities could result in a sustained increase in inflation. It may therefore come as a surprise that, over the course of the calendar quarter, bonds actually produced a reasonable positive return. The oil price peak coincided with the gloomiest headlines in early May, and since then Brent crude has fallen back to about where it was before the war started – thus indicating that the suspension of hostilities, whilst fragile, will hopefully last. Inflation and interest rate expectations have therefore also come down, and bond yields have accordingly stabilised.

Real yields look attractive, especially in the UK.

Even throughout this difficult period, long term inflation expectations (as seen in the 10-year inflation swap) have remained remarkably stable, and forward-looking oil prices never looked as alarming as the spot price did. Consequently, implied real bond yields look attractive at between c. 2% and 2.5% across most developed markets. The UK offers the highest real yield under this measure, at 2.7%, partly because we have a new prime minister in the offing whose policies are far from clear. On the one hand Mr. Burnham has pledged to abide by the fiscal rules; on the other hand there is increasing clamour for funds not only from his own favoured projects, but also from the defence sector – not to mention the myriad of factions which will regard a new incumbent in Number Ten as an opportunity put in fresh pleas for cash; and all this at a time when the ability to increase the tax burden still further from its highest level since the 1940s looks limited.

Sterling and has been surprisingly strong.

However, the risk premium attached to gilts is generous and therefore offers a potential value opportunity. The budget deficit in the UK is nothing like as high as it is in the US, and the level of government debt is not out of line with other developed market debt ratios. Moreover, the currency markets do not indicate any loss of confidence in sterling – on the contrary, sterling’s tradeweighted index has been appreciating. Whilst that might be explained in part by the extraordinary weakness of the Japanese yen, sterling has in fact kept pace with a strong US dollar, and for the last few months it has even appreciated slightly against the Swiss franc.

The US Federal Reserve’s new Chairman is keeping his cards close to his chest.

US dollar strength in recent months has also been something of a surprise given that last year quite a few pundits were heralding the decline of the world’s reserve currency following the imposition of widespread tariffs by President Trump and consistent buying of gold bullion by central banks around the world. The greenback’s recovery this year is probably attributable to rising interest rate differentials and a Federal Reserve, now under Kevin Warsh, which looks more hawkish than President Trump would wish. Early indications are that Warsh might abandon the kind of forward guidance favoured by his recent predecessors and perhaps revert to the more Delphic utterances of the late Alan Greenspan. Whilst this might be frustrating for economists around the world, there is something to be said for the idea that the Fed should keep its options open for as long as possible; on the other hand, the Fed will still need to avoid inflicting a nasty surprise on the market, like it did in 1994.

We remain underweight bonds.

Given the continued health of the global economy, widespread political risk and persistent government deficits, we remain underweight the fixed-interest asset class. However, we do find some value in government bonds – particularly at the shorter end of the curve, where yields often are only marginally lower than corporate bonds which carry additional credit risk. We also now firmly believe that index-linked securities (which we avoided for long period of time when real yields were far too low) look attractive.

Sterling trade weighted index

Source: Bloomberg, W1M. Data as at 6th July 2026.

The outlook for equities

Asian stock markets are being dominated by semiconductor shares.

We have often highlighted in Market Perspectives and our Global Outlook charts the increasing concentration of the US technology sector in the US and global stock market indices. The extraordinary performance of the NASDAQ (which in April rose for thirteen consecutive sessions – its longest winning streak since 1992) and the flotation of SpaceX as a two-trillion dollar company in June add grist to that mill. A similar phenomenon has taken hold in Asia: suddenly, the largest company in Japan is no longer Toyota or Softbank, but Kioxia Holdings – a semiconductor company that few people have heard of. In Asia ex-Japan, regional weightings have changed dramatically as the technology sector has grown in importance: over the last two years, India has halved as a percentage of the MSCI index, whilst Korea and Taiwan have between them moved from being 32% of the index to 57% today; and more than two thirds of the value of Korea’s stock market is accounted for by just two companies –Samsung and SK Hynix.

Index funds are becoming more cyclical...

This means that the Asian index is becoming less diversified, with technology now accounting for 50% of its total market capitalisation. Investors in index funds are therefore very overexposed to the highly cyclical semiconductor industry, and active managers are finding it increasingly tricky to maintain appropriate balance in their portfolios – not simply by virtue of the mathematics of these large weightings, but also the practicalities of investing in Asia: Korea has long been a difficult market for Western investors to operate in given foreign-exchange restrictions, governance concerns and more limited minority shareholder protections.

…and obscure the wide range of opportunities in Asia.

There is, however, a silver lining to these difficulties. China has gone from accounting for 57% of the regional index in 2021 to 25% today; however, the number of opportunities in China and the size of its economy have not diminished. The exchanges there may not include many hot semiconductor stocks, but there are plenty of EV (electric vehicle) plays, such as CATL, the world’s largest and most technologically advanced battery maker. Moreover, valuations in China have also declined in recent years, such that the stock market there is now on only 10 times prospective earnings. Successful and well-managed companies like Yum China look cheap, in part because some fund managers around the world have effectively been forced to sell shares in such companies in order to fund purchases in semiconductor stocks, which they are required to do in order to keep up their index weightings and satisfy risk managers for whom underperforming the index is a bigger concern than losing money in absolute terms or maintaining appropriate diversification.

It requires visits to the region and hard graft to identify these opportunities.

The Waverton Asia Pacific Fund has participated nicely in the AI / semiconductor boom, being up 26% year-to-date (only slightly behind its benchmark index); however, nearly threequarters of the fund is dedicated to the broader opportunity set in Asia and, as such, should be less vulnerable to a sudden setback in those areas which are currently highly extended. We believe that it is only through the hard graft of visiting the region, speaking to companies and testing business models against our core parameters of durability, opportunity, alignment and value that one can navigate these difficult market dynamics in a way which will prove satisfactory in the long run. That has long been our philosophy globally, and never has it been more important to stick to this than in Asia at the present time.

MSCI Philippines valuation

Source: Factset, W1M. Data as at 6th July 2026.