FROM GEOPOLITICAL SHOCK TO MARKET CONCENTRATION: THE NEXT PHASE OF THE CYCLE

When we wrote to clients in March, markets were grappling with a dramatically different set of circumstances.

At that time, the escalation in the Middle East, culminating in military action involving Iran, had interrupted what would ordinarily have been a seasonally favourable period for risk assets. Oil prices were rising sharply, volatility had increased, and investor attention had shifted away from economic fundamentals towards geopolitical risk.

The noise created volatility with markets reacting to Trump sentiment, but within a relatively narrow band.

Since then, the market narrative has evolved considerably.

While tensions in the region have by no means disappeared, investors have become increasingly comfortable with the view that the disruption to global energy supplies is likely to be manageable. As concerns surrounding the Strait of Hormuz have eased, much of the geopolitical risk premium embedded within markets earlier in the year has unwound. Equity markets have recovered strongly and oil prices have retreated significantly from their highs.

The speed of this transition has been remarkable.

In many respects, markets have moved from pricing geopolitical fears to once again focusing almost exclusively on economic growth, central bank policy and artificial intelligence-driven earnings growth. As a result, sentiment has improved considerably, but so too have some of the concerns we highlighted earlier in the year.

THE INVESTMENT COMMITTEE’S VIEW

At our latest Investment Committee meeting, we reflected on how closely recent events have followed the framework we outlined at the beginning of the year.

In March, we noted that the market’s vulnerability was not solely a consequence of geopolitical events. Rather, we believed that elevated valuations, increasingly demanding earnings expectations and stretched investor positioning had created an environment where any external shock could trigger volatility.

That assessment remains valid today.

While the geopolitical backdrop has improved, valuations remain elevated across significant parts of the global equity market, particularly within the United States. Markets have recovered much faster than underlying economic fundamentals have improved, leaving investors increasingly reliant on continued earnings delivery from a narrow group of companies.

We are monitoring carefully as we believe the longer term recessionary risk of supply driven inflation is one we are very mindful of and actively looking to mitigate as much as possible.

THE RISE OF THE “FEW”

One of the most striking features of the current market cycle is the degree to which returns continue to be driven by a small number of very large technology companies.

Artificial intelligence remains a genuinely transformative investment theme and we continue to believe that AI, automation, cloud infrastructure and digital productivity will reshape the global economy over the coming decade. However, successful investing is not simply about identifying attractive themes; it is equally about understanding valuation, expectations and risk.

Recent market gains have become increasingly dependent upon a handful of mega-cap technology businesses delivering near-perfect outcomes. Semiconductor manufacturers, cloud providers and digital platform companies have once again led market performance as investors have rotated back towards growth assets.

History teaches us that periods of narrow market leadership can last longer than many expect. It also teaches us that when expectations become excessively optimistic, diversification becomes increasingly valuable.

For this reason, we continue to view the current environment with a degree of caution.

POSITIONING FOR RESILIENCE

The decisions we took during the latter stages of 2025 and maintained throughout 2026 continue to serve portfolios well.

Our rationale then was straightforward. Valuations were becoming increasingly demanding, market leadership was narrowing, and the balance between risk and reward appeared less attractive than it had during the earlier stages of the recovery.

Those conditions have not materially changed.

As a result, we have maintained our conservative approach with a focus on diversification.

UNDERWEIGHT EQUITY RISK

Portfolios remain modestly underweight equities relative to long-term strategic allocations.

This is not a reflection of a bearish outlook. Rather, it reflects our belief that current market pricing offers less compensation for risk than has been available historically.

Maintaining a degree of caution allows us to preserve capital while retaining flexibility should more attractive opportunities emerge.

HEDGES AGAINST LARGE-CAP TECHNOLOGY

Given the increasing concentration within global equity indices, we continue to maintain hedging strategies against large-cap technology exposure.

These positions are not intended to eliminate participation in technology-related growth. Instead, they provide protection against the possibility that expectations for a small number of market-leading businesses become overly ambitious.

In our view, sensible risk management requires recognising not only where opportunities exist, but also where risks may be underappreciated.

FIXED INCOME AND DEFENSIVE ASSETS

We continue to favour high-quality government bonds and global fixed income as important sources of diversification.

Similarly, our strategic allocation to gold continues to fulfil its intended role within portfolios. Whilst gold benefitted significantly during the height of geopolitical uncertainty, its value extends beyond any single event. It remains an effective hedge against market stress, policy uncertainty and inflation surprises.

LIQUIDITY AS A STRATEGIC ASSET

One of the Committee’s key discussion points was the importance of maintaining flexibility.

Periods of heightened market concentration often create valuation anomalies elsewhere. By preserving liquidity and maintaining a measured risk stance, we retain the ability to redeploy capital quickly should volatility create compelling opportunities.

LOOKING AHEAD

The second half of the year presents a market environment that differs markedly from the one we entered in January.

Geopolitical concerns have moderated, but they have not disappeared. Inflation pressures have eased, but central banks remain cautious. Most importantly, markets continue to place considerable faith in a narrow group of companies to deliver the growth required to justify current valuations.

For investors, this creates both opportunity and risk.

Our role is not to predict geopolitical outcomes or short-term market moves. It is to assess valuations, manage risk and position portfolios so they can participate in long-term opportunities while remaining resilient during periods of uncertainty.

SUMMARY

The past six months have been a powerful reminder that market narratives can change quickly.

The fears surrounding Iran and Middle East instability that dominated discussion earlier in the year have largely been replaced by renewed enthusiasm for technology and artificial intelligence. Whilst this shift has supported markets, it has also reinforced the valuation and concentration risks that we identified previously.

Consequently, the Investment Committee has elected to maintain a disciplined and measured approach.

Our positioning remains characterised by:

• modest underweight allocation to overall equity risk.

• Hedging against excessive concentration in large-cap technology stocks.

• Strategic allocations to high-quality bonds and gold.

• Strong liquidity levels to capture opportunities created by future volatility.

• A continued focus on valuation discipline and risk-adjusted returns.

• A focus on diversification to manage risk.

As ever, our philosophy remains unchanged:

Protect capital when risks are elevated

Remain patient when markets become complacent.

Deploy capital proactively when opportunities arise.

The headlines may change, but disciplined investment management never does.