Q3 2026 Market Outlook – Quarterly Investment Review

We’re not investing approximately $200 billion in capex in 2026 on a hunch. Andy Jassy, CEO of Amazon

For the first time since the Medici were bankers to François I, yields on 10-year French government bonds now stand above the yields on Italian, Spanish, Greek or Portuguese bonds. Louis Gave

Markets Navigate Rising Yields and Political Uncertainty

Markets contended with several conflicting forces during the third quarter. Bond yields rose, the oil price spiked, and the political backdrop was unsettled as the US approaches the midterm elections in November, with an increasing expectation that President Trump may lose his majority in Congress. In July a $45 billion AI focused hedge fund blew up when the S&P500 was down just 3%, due to excessive leverage. Nonetheless corporate earnings were strong, and some announcements spectacularly so. Moderna declared a successful trial result in July, and its stock price recorded the largest ever one day move for an S&P500 share with a 177% jump. During the quarter the US 10-year bond yield rose from 4.47% to 5.29%. The S&P500 rose by 2.3%. The Brent crude oil price rose by 29.5%, and gold rose 3.7%.

Bond Markets Are Sending a Warning Signal

Longer dated government bond yields have been breaking important levels. The 30-year bond in the US is at 5.63% (its highest level since 2002), in Japan they have broken above 4% (a level never seen since the country issues at 30 years), and in France and the UK they are 5.47% and 5.95%. The US 10-year yields 5.29%, also the highest level since 2002. The size of government debt is far greater than it was when yields were previously at these levels, so these higher yields are much more painful than they were then. The US budget deficit continues to deteriorate. The deficit in July was $432bn, far worse than the expected $300bn, and a significant deterioration from the $291bn the previous July, and worse than any single month outside the Covid crisis. For the US, and other western countries, the arithmetic of this debt is becoming unforgiving. $8 trillion of US Government debt will roll over in the next 12 months at interest rates 1% higher than their current coupons, adding $80bn in extra annual interest payments.

This is before the $2 trillion annual deficit is funded. Each refinancing deepens the deficit and adds more debt. It is probably because of these runaway budget deficits that western bond yields are rising as markets start to question the sustainability of this enormous debt issuance. There is also the inflationary pressure from higher commodity prices. The day before the US bombed Iran the 10-year Treasury yield was at 3.95%, now it is at 5.29%. While oil prices have risen the impact has been cushioned by drawing down reserves. However there has been a much more dramatic rise in oil products, such as diesel where supply has been constrained by refineries being shut down in the Gulf, and the destruction of capacity in Russia. Higher prices for diesel and other oil derivative products feed quickly into higher transportation costs, and puts pressure on labour costs, all of which is inflationary and adds further pressure to bond yields. What is most worrying is that these deficits and spiralling costs are occurring during a relatively benign economic period. How much worse would the figures look if the economy slipped into recession. Nonetheless if US Treasury yields go much higher then US pension funds would start to be natural buyers. Their target return tends to be 6-8%. If yields approach 6% then it makes sense for them to buy that return in a product guaranteed by the government.

Structural forces make changing policy difficult for governments. For forty years interest rates fell, and for the decade and a half following the financial crisis of 2008 raising debt was almost cost free. Spoilt by these conditions’ governments expanded their spending plans, largely on welfare. A vast expansion of social spending ensued. Perhaps the height of this lax attitude to spending was President Trump’s promise to give every adult American a $5000 cheque if the Republicans retain control of both houses of Congress. If delivered this would see borrowed money offered to voters by a government already heavily overindebted. Now an ageing population requires more pension and healthcare payments, while globalisation introduced a far more competitive labour force leading to an entrenched unemployment class. Social welfare payments are ballooning.

Any threat to remove the benefits for these groups has proved electoral suicide, so necessary economic decisions have become politically impossible. The only way to curb profligate governments and control entitlement spending is for bond yields to rise to the point that threatens or produces a crisis which forces the government to take hard decisions. Bond markets appear to be doing just this. Governments are also facing competition from the private sector for the first time in many years. The slow recovery since 2008, particularly of the banking sector, has meant that the private sector has not sought major financing. The AI revolution has changed this. The largest technology companies which were self-financing up to now, have been conducting enormous spending on projects to develop their AI projects, which has required them to use the debt markets.

So, governments are demanding mountains of money for their welfare plans while the tech giants are demanding mountains of money for productive infrastructure like the grid, power, and datacenters. Money goes where it is treated best so governments need to compete for this capital with some of the most efficient and successful companies of all time. This is healthy. Nevertheless, rising rates are always uncomfortable for financial assets, because equity market corrections are nearly always caused by a recession or monetary tightening. The current rise on rates raises the potential for a setback.

The AI Investment Boom Faces Its First Real Test

Stock markets still continue to be dominated by the AI theme, which in turn is dominated by a handful of companies, particularly the so-called Magnificent 7 and semiconductor companies. July saw a sharp correction in these names, which wiped out the Situational Awareness fund. However, the most damage occurred in the Far East and particularly Korea, where speculative hysteria reached extreme levels. When the correction arrived 3.4% of the adult Korean population received a margin call, and there were stories of speculators selling their blood plasma to cover their losses.

Importantly though this correction was caused by financial over extension not fundamental earnings. The companies involved continued to post stellar earnings results. Nonetheless bond markets have started to question the gargantuan spending by the companies building the AI infrastructure and as with government debt the yields of the debt of US big technology companies have risen; and for example, in July the debt of Oracle was downgraded. The scale of the AI build out is enormous. The cumulative capital expenditure for the next few years is estimated at about $11 trillion which is far larger than previous large capital projects such as the internet build out in 2000 or housing boom that led to the bubble in 2008.

A lot of the cashflow from this expenditure goes to the semiconductor companies whose chips power everything, but the average life of these chips is far shorter than the railway tracks or fibre optic cables that were overexpanded during previous bubbles, so it is a valid question to ask what depreciation rate and what the return on capital of these investments will be? A considerable amount of the economic growth in the US has been due to the vast spending of Open AI and Anthropic, the leading developers of AI software, but this could slow down.

Both companies have highlighted risk concerns of the dangers of unbridled AI, and as the advantage gap has narrowed between them and their competitors, including Chinese models, it isn’t obvious why consumers will continue to pay several times more for the cleverest application when the other models perform adequately the task most users require. If this sector slows down, then that would have significant implications for both US GDP growth and the stock market.

Strong Earnings Continue to Support Equity Markets

With all these concerns why has the stock market held up so well? The principal reason is that earnings have been exceptionally strong, and this is partly due to AI starting to boost profits of companies beyond the technology sector by improving efficiency. Global earnings have been growing at a rate of mid-teens to twenty percent, which is well above anything experienced in post war history, other than in a recovery from a cyclical economic low point. The effect is twofold. AI can be used to improve productivity and to lower costs. It is particularly effective in companies that use a lot of data which it can digest and organise in seconds. Banking is one example and it is remarkable that while the technology companies have gone from being cash generative to debt hungry, banks have done the reverse going from being dependent on government bail outs to being in a position where they are returning significant amounts of excess cash to their shareholders.

Opportunities Beyond US Exceptionalism

This year is seeing further evidence of a reduction of American exceptionalism in terms of stock market performance. Since Trump was sworn in most other regions have outperformed the US, and in the case of the Emerging Markets and Japan by a handsome margin. This reflects better starting valuation levels of share prices outside the US, but also an improved economic environment.

Many Emerging Markets, for example, have followed far more orthodox economic policies than their Developed Market peers. With strong trade surpluses and far stronger fiscal balances than the West their currencies should appreciate offering extra potential for return. In terms of sectors the energy and mining sectors have been strong. Higher energy prices make oil stocks an obvious beneficiary of the troubles in the Middle East. It is an anomaly that they represent only 3.5% of the index yet are estimated to account for over 8% of the earnings.

The longer the oil price remains high the more glaring this anomaly will be. Mining companies have an equally strong outlook as they benefit from both government expenditure, due to the need to renovate old public infrastructure, and the AI boom, because datacentres and the electrification of the grid is commodity intensive. Gold should also perform well. History suggests that governments facing high debt burdens rarely overcome them through austerity. Especially in democratic systems they maintain nominal interest rates below the rate of inflation, which results in currency debasement and even financial repression.

This environment is supportive of gold as investors seek to protect their wealth and purchasing power. Moreover, for longer term investors an opportunity has been opened up by the crowding into the AI theme by most investors. Currently trading is dominated by computing program driven funds, passive flows, and pod shops that are chasing quarterly returns. They tend to herd into the same names and sell everything else. This creates an opportunity for investors with longer time frames that can buy companies with good fundamentals that have been sold to cheap levels, though the caveat to this is that there is no certainty on when they will be rerated.

Investment Outlook: Volatility Returns but Opportunities Remain

The Hormuz situation presents the world with more uncertainty than one and two quarters ago. Elevated and rising oil prices have a history of causing financial upheaval because of their effects on increasing prices and wages. When oil prices rise enough they have often tipped the economy into recession. Bond yields are reflecting this, but they also reflect strong growth, and this growth is producing strong corporate earnings. If the energy situation is resolved both bond and equity markets are likely to improve. The opportunities are in select areas, but investors are likely to have to withstand more volatility than in the past few years.

Written by James Macpherson

Click HERE to download the full Q3 2026 market oulook.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Q2 2026 Market Outlook – Quarterly Investment Review

The US is pouring more capital into AI data centers in 6 years (~$930B) than the inflation-adjusted cost of the Marshall Plan, Apollo, Manhattan Project, and the Interstate Highway System — combined. Meanwhile: AI ≈ 45% of the S&P. Energy ≈ 4%. Everyone is overweight the thing that needs power. Underweight the power. – Ron Stoeferle, May 12^th 2026

Markets Look Through the Hormuz Crisis

Despite the troubling backdrop in the Middle East, equity markets enjoyed a strong quarter. This was partly because at the end of March markets were near the bottom of their plunge following the closure of the Hormuz Strait, but also due to exceptionally strong earnings driven by capital expenditure in AI-related projects and governments continuing to provide substantial fiscal support. Nonetheless, with the situation in Hormuz still unresolved at the end of June, it was astonishing how powerful the move was, as the S&P 500 surged to new highs. The rally was led by the semiconductor index, which doubled, although it also masked a furious rotation out of software stocks such as Microsoft and Adobe, which continued to decline. This move was reflected in Emerging Markets, where a handful of stocks in Korea and Taiwan leapt higher.

For the quarter, the MSCI World rose 13.3%, the MSCI Emerging Markets Index gained 22.6%, US 10-year Treasuries were flat, and gold fell 14.2%.

The Hormuz crisis remains unsettled. So far, the world has been shielded from a major inflationary shock by drawing down reserves; estimates suggest that 1.4 billion barrels of oil and oil products have been released globally from reserves since the conflict began. However, this cushion is not limitless. While the United States and Iran have signed a Memorandum of Understanding aimed at ending the conflict, agreeing on the details is proving difficult. Despite an overwhelming military victory, the US has failed to establish control of the vital sea lanes through which oil, gas and many of their derivatives flow.

Global Supply Chains and the Return of Inflation Risk

The conflict has highlighted how many critical products originate in the region, including sulphuric acid, which is essential for mining; helium, which is vital for semiconductor manufacturing; fertiliser; and jet fuel. The situation underscores a wider point: there are numerous global choke points. After thirty years of globalisation, production has become concentrated in a handful of locations, while the risk of disruption has increased.

The Malacca Strait, for example, is under three kilometres wide at its narrowest point. China maintains an almost complete monopoly in the production of rare earths, while Asia dominates large parts of the world’s manufacturing base. The global supply system is a sophisticated ballet built on the assumption that there will be no impediments. The de-industrialisation of the West has therefore left it vulnerable to choke points on the other side of the world.

Restarting these industries at home is proving difficult. The result is a world that is more prone to inflation, both because countries are likely to stockpile commodities to guard against future disruptions and because efforts to relocate strategic industries will be highly resource intensive. In many areas, countries will effectively be starting from scratch. In international shipping, for instance, the largest American shipping company, Matson, accounts for just 0.2% of the global market.

The AI Investment Boom Continues

In the United States, the stock market is being driven almost exclusively by the AI boom. Indeed, this boom is responsible for much of the growth in the economy. The numbers are extraordinary. The hyperscalers are forecast to spend $805 billion on their AI plans this year and $1.116 trillion next year. Remarkably, these spending plans continue to increase.

McKinsey estimates that $6.7 trillion will need to be spent on data centres between now and 2030. The scale of investment has reached the point where many of these companies are spending all of their cash flow, and more, to remain competitive. It is a curious situation in which the most profitable companies in history are reinvesting virtually every dollar they earn simply to stay in the race.

This spending is boosting corporate earnings in three ways. It is driving capital expenditure, supporting stock market gains and therefore consumer spending through wealth effects, and improving productivity. Since the launch of ChatGPT, US labour productivity has increased in 13 of the past 14 quarters.
While select AI-related stocks have soared, many of the commodities essential to building the required infrastructure and data centres have been largely overlooked. Having lagged the broader AI trade, they are beginning to look increasingly attractive.

Mega-Cap Fundraising and Growing Liquidity Concerns

The last quarter was notable for the launch and announcement of several enormous stock market listings. Elon Musk’s SpaceX listed at a valuation of $1.77 trillion, raising $86 billion of fresh capital, followed a few weeks later by a further $20 billion in the debt markets. Together with his Tesla holdings, Musk became the world’s first trillionaire, with a net worth exceeding the value of bitcoin.

Anthropic and OpenAI are also targeting market listings at valuations above $1 trillion. In addition, Alphabet raised $80 billion in equity capital and Meta is expected to raise substantial funds as well. In total, these companies may raise close to $300 billion. While sizeable, this remains manageable in the context of a stock market that returned $1.6 trillion to shareholders last year.

However, from mid-August through year-end, approximately half of SpaceX’s market capitalisation — roughly $1 trillion of stock — becomes unlocked and eligible for sale. The scale of this potential supply is considerably more challenging to absorb. Given the pipeline of upcoming IPOs and secondary offerings, the second half of 2026 could experience significantly greater liquidity stress than investors have become accustomed to during recent years of abundant liquidity.

Moreover, the returns on AI investment remain largely unproven. Revenues are modest and profits even more so. Yet AI has become such a dominant market narrative that it has drained attention and capital from many other sectors, leaving broad swathes of the market languishing.

This presents a particular challenge for private equity, which has struggled to realise investments despite strong public markets because many assets are still held at valuations that buyers are unwilling to accept. Private equity and private credit flourished after the 2008 financial crisis largely because they operated with lighter regulation than public markets and banks. However, signs of strain are beginning to emerge.

Many institutions have substantial allocations to private assets. To the extent they require liquidity and cannot access it through those investments, they may need to sell listed equities and bonds instead, creating additional pressure on public markets.

Bond Markets Face Structural Headwinds

OECD bond markets have been disappointing investments for several years. One reason is that governments across the developed world have issued excessive amounts of debt for more than two decades as they attempted to spend their way towards economic growth. The debt burden has now become so large that interest payments are consuming ever-growing portions of national budgets.

In the United States, federal interest expense represented 8.7% of federal receipts in fiscal 2021. During the first five months of fiscal 2026, that figure exceeded 20%. In May, the US Treasury sold 30-year bonds at a yield above 5%, the highest level since 2007 and a sign that enthusiasm for the world’s most important bond market is fading.

Nor does the United States have the most concerning outlook. The UK picture is particularly alarming. Government spending consistently exceeds projections, while debt raised during the era of ultra-low interest rates now needs to be refinanced at materially higher yields.

The extent of the adjustment can be seen in a UK government bond issued in May 2020 and maturing in 2062, whose price fell from 100 to as low as 22 in May this year. UK government bond yields are now higher than those of Greece and Morocco.

The outlook for bonds remains challenging. Inflationary pressures from the Iran conflict are still filtering through the global economy, while even technology companies are raising prices, with Apple increasing some prices by as much as 20%. This comes at a time when many governments are already grappling with fiscal deficits and rising pressure to increase military expenditure.

Why Japan Could Matter More Than Investors Expect

Perhaps the most significant bond market development has occurred in Japan. The near-zero interest rates that prevailed for almost three decades have started to move higher and closer to those available in Western markets.

Japan’s enormous pool of domestic savings has long supported global asset markets because opportunities at home were limited. As Japanese yields become more attractive, capital has a growing incentive to return home. Should that process accelerate, it could have meaningful implications for speculative assets and liquidity conditions globally.

Investment Outlook: Diversification Over Concentration

At present, stock markets remain dominated by the AI theme and the extraordinary earnings growth being generated by the companies leading this technological revolution. AI is undoubtedly transformative. However, transformative industries can become poor investments when enthusiasm reaches extremes, because everyone builds simultaneously and pricing power evaporates when demand eventually slows.

The bubble may therefore lie more in the “E” than the “P” of the P/E equation.
It is notable that Warren Buffett recently remarked that he was seeing more speculation than at any other point in his career — a remarkable statement from a ninety-five-year-old investor with such experience.

The safer opportunities may lie in trends that were temporarily interrupted by the Iran conflict. Last year saw a rotation away from highly valued US assets towards more attractively priced opportunities in Europe, Japan and Emerging Markets, although investors should be careful not to chase the hottest parts of the market.

A US market collapse is not inevitable. While US indices are trading at elevated levels, they may simply deflate over an extended period, as occurred between 1966 and 1982 when the market went essentially nowhere. Beneath the surface, however, there were still numerous opportunities and skilled stock pickers generated attractive returns.

As we conclude this Q2 2026 Market Outlook, investors should increasingly focus on diversifying portfolios across geographies and sectors. Bonds remain broadly unattractive, while in currencies the US dollar is likely to weaken moderately over time. Particular attention should be paid to the Japanese yen, which may become increasingly influential as global capital flows evolve.

Written by James Macpherson

Click HERE to download the full Q2 2026 market oulook.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Q1 2026 Market Outlook – Quarterly Investment Review

The guerrilla wins if he does not lose. The conventional army loses if it does not win. – Henry Kissinger

Stock markets’ strong performance in 2025 continued into the first two months of this year, despite an increasingly disturbing geopolitical backdrop. This Q1 2026 market outlook examines how quickly sentiment shifted as geopolitical tensions escalated and began to materially impact global markets.

On January 3rd, US special forces captured President Maduro of Venezuela and brought him to face trial in New York on charges of narco-terrorism. As the quarter progressed, President Trump sought to annex Greenland, an autonomous territory of Denmark, and rhetorically suggested that the US could annex Canada, while also announcing his intention to ‘take Cuba’. While these developments contributed to a growing sense of instability, they were ultimately overshadowed by the US/Israeli attack on Iran on the last day of February.

Iran’s response was decisive. By effectively closing the Straits of Hormuz—through which around 20% of the world’s energy supply transits—the country triggered the largest global energy disruption since the Second World War. Oil prices surged by 68% in March alone, reshaping expectations for growth and inflation alike.

This sudden escalation exposed fractures within the NATO alliance and raised broader questions about the role of the United States as a stabilising global force. Markets, which had largely ignored geopolitical noise at the start of the year, rapidly repriced. By the end of the quarter, the MSCI World Index had declined by 3.4%, while US 10-year Treasury bonds were marginally lower.

A fragile and highly binary environment

The current situation remains fluid, uncertain and increasingly binary. Despite overwhelming conventional military superiority, the US has struggled to secure safe passage through the Straits of Hormuz. The threat posed by low-cost, asymmetric tactics—drones, naval mines and fast-moving explosive vessels—has proven highly effective.

Oil tankers, by nature slow and vulnerable, are particularly exposed. Even naval forces have had to retreat at times to avoid concentrated drone attacks. While limited shipments continue under Iranian oversight, the broader disruption remains unresolved.

The economic implications are significant. The longer the situation persists, the greater the strain on global supply chains. Inflationary pressures are already emerging as delays, shortages and logistical bottlenecks feed through to prices. Compounding this, damage to regional energy infrastructure may take years to repair, suggesting that the effects of this shock could extend well beyond the immediate crisis.

Beyond oil: a systemic supply shock

While oil dominates headlines, the real impact is more complex and far-reaching. Refined products such as diesel, jet fuel and naphtha are essential inputs across multiple industries. The disruption therefore affects not just energy markets, but the broader functioning of the global economy.

The region hosts 68 oil refineries, strategically located to benefit from low-cost energy. These facilities produce a wide range of materials that underpin industrial activity—from transportation fuels to petrochemicals used in plastics.

Energy remains deeply embedded in modern economic systems. Oil and gas are not only central to transport, but also to electricity generation, fertiliser production and manufacturing processes.

For instance, Taiwan relies on liquefied natural gas (LNG) for roughly 40% of its electricity generation, with a significant portion sourced from Qatar. LNG is difficult to store at scale. Any disruption risks forcing rationing, particularly for industrial users. This would have immediate consequences for semiconductor production—an essential component of the global technology ecosystem and AI supply chain.

The Middle East also supplies a substantial share of the world’s helium, critical for both semiconductor manufacturing and aerospace applications. In addition, it is a key source of sulphuric acid, required for processing metals such as copper, nickel and uranium—materials central to electrification and the energy transition.

Another critical vulnerability lies in agriculture. Approximately one-third of global fertiliser shipments pass through the Straits of Hormuz. The timing of the disruption—coinciding with the spring planting season in the Northern Hemisphere—raises the likelihood of food price inflation in the months ahead.

Macroeconomic transmission channels

The economic impact of higher energy prices is well understood, but no less significant. First, rising costs reduce consumers’ disposable income, leaving less available for discretionary spending. Second, heightened uncertainty leads households and businesses to delay major purchases.

Third, concerns about employment prospects tend to increase precautionary savings, further dampening demand. Finally, if inflation accelerates, central banks may be forced to tighten monetary policy, increasing borrowing costs and slowing economic activity.

What makes the current situation particularly challenging is the lack of short-term alternatives. Energy systems are not easily adaptable. Vehicles, industrial processes and heating systems cannot quickly shift away from fossil fuels, reinforcing the persistence of the shock.

Historically, oil price spikes of this magnitude have often preceded economic slowdowns or recessions. While today’s global economy is less energy-intensive than in the 1970s, the scale and breadth of the current disruption remain concerning.

Financial markets: vulnerabilities beneath the surface

This shock comes at a time when several areas of the financial system already appear stretched. Technology companies—particularly hyperscalers—are investing heavily in infrastructure, with capital expenditure expected to reach $600 billion this year, largely driven by AI development.

At the same time, parts of the private credit market are showing signs of strain. These segments, often less transparent, may be particularly sensitive to tightening financial conditions. In parallel, an estimated $3.8 trillion of private equity assets remain unsold, awaiting favourable exit conditions.

Higher energy prices and increased volatility could place additional pressure on this ecosystem, raising the risk of forced adjustments or delayed liquidity events.

Another important consideration is the role of energy-exporting nations in global capital flows. Historically, Gulf states have recycled oil revenues into international financial markets, notably US government bonds and equities. Any disruption to these flows—whether due to reduced production or increased domestic spending needs—could remove a key source of liquidity.

This comes at a time when public finances in many developed economies are already under strain. US government debt has reached $36 trillion and continues to rise rapidly. In the UK, welfare expenditure now exceeds income tax revenues. These constraints limit policymakers’ ability to respond aggressively to future shocks.

A path to de-escalation?

Despite the severity of the situation, there are reasons to believe that a resolution remains possible. Both the United States and Iran face strong incentives to avoid a prolonged conflict.

In the US, the upcoming mid-term elections represent a significant political constraint. A deterioration in economic conditions could weaken the administration’s position, particularly given the narrow balance of power in Congress.

Iran, meanwhile, is grappling with acute economic stress. Hyperinflation and currency collapse have created conditions that historically increase the risk of domestic instability. These pressures may encourage a negotiated outcome.

Should a resolution be reached and the Straits of Hormuz reopen, energy markets could stabilise relatively quickly. Oil prices, currently elevated, could fall materially, alleviating pressure on both inflation and growth.

Recovery scenario and structural drivers

In such a scenario, the broader economic backdrop could reassert itself. Fiscal stimulus in major economies—including the United States, Germany and Japan—remains supportive. At the same time, China continues to benefit from strong export dynamics.

Longer-term structural trends also remain intact. The expansion of data centres to support artificial intelligence, alongside the need to modernise electricity grids, is driving sustained demand for commodities and infrastructure investment.

Recent events may even reinforce these trends. The disruption has highlighted the strategic importance of secure and diversified supply chains, particularly for critical materials. As a result, governments and companies may increase investment in resilience, including stockpiling and domestic production capacity.

Conclusion: navigating uncertainty

Markets have entered a phase where outcomes are increasingly dependent on geopolitical developments. The range of potential scenarios remains wide, from prolonged disruption and economic slowdown to a relatively rapid normalisation.

The longer the current impasse persists, the greater the risk of compounding effects across supply chains, inflation and financial markets. However, political and economic incentives on both sides suggest that de-escalation is a realistic possibility.

In parallel, policymakers—particularly central banks—may respond to deteriorating conditions with supportive measures, especially in politically sensitive periods.

For investors, this environment calls for caution and discipline. Diversification, resilience and a focus on underlying fundamentals remain essential. While uncertainty is likely to persist in the near term, periods of dislocation can also create opportunities for those positioned to navigate them effectively.

Written by James Macpherson

Click HERE to download the full Q1 2026 market oulook.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Quarterly Investment Review – Q4 2025

We’re seeing substantial asset inflation away from the dollar as people are looking for ways to effectively de-dollarise, or de-risk their portfolios vis-a-vis US sovereign risk.
Ken Griffin

‘‘The multiples of technology stocks should be quite a bit lower than the multiples of stocks like Coke and Gillette because we are subject to complete changes in the rules’’ Bill Gates in 1998

‘‘I’m willing to go bankrupt rather than lose this race’’
Larry Page, co-founder of Google

2025 was a gangbuster year for financial markets. Most equity markets delivered double digit gains, and most bond markets also generated positive returns. Apart from oil and the grains market, commodity markets were strong, and precious metals enjoyed spectacular returns. For once the US market was not the best performer. After a decade and a half of dominating equity returns the US produced one of the weaker performances, and if the currency is taken into consideration that result was even further behind, as the US dollar fell approximately 10% during the year. Elsewhere strong results were widespread across European, Asia and the Emerging Markets. The MSCI World Index was up 19.5% in US dollars or 16.9% measured in Local Currencies, and the S&P500 was up 16.4%.

Given the political background in 2025 this result might seem surprising. President Trump initiated a trade war by imposing tariffs which bludgeoned the world trade system. In Europe, the UK and France endured rolling political difficulties centred on both countries inability to contain their debt problems. The Ukraine war continues, while the Gaza war has reached an uneasy truce. What accounted for the market’s rise was good earnings growth in the US, while in Europe it was due more to a rerating. Underpinning all markets was an exceptionally supportive liquidity environment. Fiscal policies in all the major economies were benign – the US, China, Japan and most EU countries ran deficits of about 5% of GDP; low interest rates prevailed across the world; the US dollar weakened, which was particularly helpful for those Emerging Markets whose currencies were pegged to the dollar; and oil prices declined by close to 20% in US dollars and even more in other currencies, which has the effect of a giant tax cut for the world’s consumers. 2025 thus represented a rare occasion when the global economy, even though it wasn’t in recession, was stimulated by every lever at Governments’ disposal. This stimulus looks set to continue into 2026 as Trump’s One Big Beautiful Bill kicks in during January, as well as a promise of more deregulation. Germany’s giant fiscal boost will also get underway, and OPEC have increased their production to keep energy prices subdued. Given the midterm elections in the US in November President Trump will do everything he can to juice the economy in the run up to that.

Such stimulus could trigger inflation, and the biggest danger to stock markets would be a selloff in the bond markets, particularly the long end, on fears that the incontinent profligacy of government spending is unsustainable. While bond markets were stable in 2025, they have been poor investments in the last decade due to mounting concerns about Western debt profiles. According to Gavekal, since July 2020 the real return on a constant 10-year duration US Treasury bond has been minus 33%, and minus 37% for a German bund. Many Western countries debt to GDP ratios have risen above 100% and have annual deficits of 5–7% The interest cost on Government debt, for example, now exceed £110bn in the UK and $1 trillion in the US. As these debts spiral ever higher bond investors are being presented with the equivalent of investing in a share that yields 4% while it is annually increasing its share count by 7%. It was a striking feature of 2025 to see the complete failure of governments’ attempts to rein in these deficits. Trump campaigned a year ago on a promise to slash government spending, but Elon Musk’s DOGE effort collapsed in three months. The UK and France failed to remove even minor items of welfare spending from their budgets. It appears to be impossible to control the excesses in the public sector in these countries. In this context the change of Federal Reserve Chairmanship when Jerome Powell retires in May may be one of the most significant in history. The new Chairman will be chosen by President Trump on the basis that they will be expected to set rates significantly below current levels. Coming at a time when inflation is above target, deficits are at record levels, and global confidence in US policy is fragile, investors will have to grapple with how markets react to this new regime at the Fed. Meanwhile Governments will continue to overspend. The likelihood is that this spending will only be controlled when there is a failed bond auction which will force them to economise.

The US equity market’s superior returns have overwhelmingly stemmed from the extraordinary performance of its technology sector and particularly the largest companies, commonly referred to as the Mag 7. Since November 2022 when ChatGPT was released the US stock market has added $30 trillion in market capitalisation as the profits promised by AI (Artificial Intelligence) have come to obsess investors. As a result, the largest stock, Nvidia, has a larger weighting in the MSCI World Index than the entire Japanese market. In order not to fall behind in the AI race the leading companies are spending gigantic sums. Forecasts estimate that they will spend $566 billion in 2026, following $441 billion in 2025. Projections for the next several years suggest it will continue at these levels. Unlike the internet boom which rewarded successful operators for minimal capital investment, the AI build out is capital intensive and the returns uncertain. The datacentres that are at the heart of AI are subject to rapid obsolescence, with their useful economic life estimated at less than eight years. The relentless innovation in the sector could mean that whatever is cutting edge today is overtaken in the next few years leading to costly updates and overhauls, making it even more challenging to earn a satisfactory return on today’s investment. When money is allocated so fast in what remains a speculative industry the risks become much higher. There is little doubt that AI will be a transformational technology, but as with the railways and the internet much of the early capital invested may come to grief. The concern is that because the Mag 7 have been so entwined with the rise in the market if they fail to execute a satisfactory return on their enormous investments this failure will undermine the market. Their health has become the health of the entire market. Equally concerning is if this investment does justify itself then where will this profit come from? The most likely source is that it will derive from companies shedding labour. This uncertainty on how AI will be deployed into the economy means that firms have already reduced hiring, particularly of graduates. PwC have reduced graduate hirings by 35-40% for example. As firms work out how to use it, this jobs freeze may morph into firings. Historically when technology has made people redundant, they have found new jobs, but the speed of change this time may be quicker making the transition harder. Eventually the impact will be on the older generation who have less transferrable skills and the effect of this could be cataclysmic. This is likely to become an increasing political problem.

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Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Quarterly Investment Review – Q3 2025

“In times of rapid change experience can be your worst enemy.”
John Paul Getty

“Sooner or later every generation is shocked by the behaviour of interest rates.”
S. Homer and R. Sylla, A History of Interest Rates (1977)

“Government is basically unfixable.”
Elon Musk

Equity and bond markets advanced during the third quarter recovering from the turmoil following the introduction of tariffs in April. The MSCI World was up 7.3%, and the
US 10-year bond rose by 1.3%. In the currency market the dollar continued to weaken and is now down 9.9% for the year. Reflecting this move Gold has risen by 47% year to date.

Bonds have been a poor investment over the last decade. The ten-year rolling return from US Treasuries to January 2025 was minus 1.3%, the worst performance on record. This resulted from a combination of the exceptionally low interest rates that prevailed during the 2010s, and the return of inflation five years ago. Every month over the last four years inflation has been above the Federal Reserve’s 2% target. Alongside this poor performance Government debt has been ballooning. US National Debt exceeds $37 trillion, equivalent to about $279,000 per household (based on 132.6m households). For comparison the median net worth per household is about $192,700 (the mean is about $627,900). President Trump’s One Big Beautiful Bill which passed into law in early July exacerbates the problem. It is estimated that the Bill will increase the US fiscal deficit by a further US$3 trillion over the next decade. This from a President that campaigned in last year’s election to improve the fiscal position. Elon Musk’s attempts to rein in Government spending through the DOGE project have fizzled out, and the Administration has returned to running a budget well beyond its income. President Trump’s attacks on the Federal Reserve Chairman, Jerome Powell, and threats to take away the Central Bank’s independence have undermined faith in US bonds even more. In Europe the situation is even worse. Both the UK and France have appalling debt profiles which continue to deteriorate. These problems derive from the seemingly inescapable weight of entitlement spending and interest costs, aggravated by generous healthcare provision in the face of deteriorating demographics. The UK now spends twice as much on debt interest as education. France last managed to balance its budget in 1974. Nor are these chronic problems the result of low tax collection. Most European populations are over-taxed, and it will be difficult to squeeze more out of over-burdened taxpayers. The top 1% of UK income taxpayers already pay for 28.5% of the income tax paid. In terms of controlling spending both the UK and French Governments have failed in their attempts to reduce their expenditure, being forced to reverse even small reductions in social benefits. The continuing risk for government bonds in all these spendthrift countries is that when their governments cannot tax, they start to print money to pay the difference, thereby debasing their currency and eroding the value of their bonds. In effect it is default by another name.

Such precarious governmental finances would seem to be an unfavourable backdrop for equity markets, but they have shrugged off concerns. Since President Trump’s tariff announcement in April this year the S&P500 has added $35 trillion of value, equivalent to half the GDP of the US. Much of this increase is related to the technology sector. Since the release of ChatGPT in November 2022 markets have become obsessed by the view that AI (Artificial Intelligence) will lead to a surge of productivity and profitability. The largest companies are investing gargantuan sums to try and secure this, and it has led to an extraordinary increase in the market capitalisations of the beneficiaries. Nvidia’s market cap, for example, has risen from $308 billion to $4.4 trillion in three years. Besides being the centre of AI, America also benefits from much more competitive energy prices, courtesy of the fracking revolution, which has helped both businesses and consumers. Unlike the US Government the S&P companies have much healthier balance sheets and with the economy expanding steadily these companies are extremely profitable. They are generating excess cashflow and a lot of that is returned to shareholders through share buybacks. Together with flows from retail investors $7-8 billion dollars of liquidity flows into the US market every day. In most bull markets cashflow is absorbed by IPOs, as entrepreneurs take advantage of a strong stock market to list their companies. But this has not happened this time. Half the market consists of index tracking funds which cannot buy new issues because they are not yet part of an index. The rest of the market is very short term focused (the so-called pod shops), or too price sensitive to pay the high multiples that the current market is enjoying. So, the IPO market is moribund, and the flows that would have been diverted to new issues have remained bottled up in the existing index. As a result, the S&P resembles a cash machine which recycles much of the cash it produces back into the market. This is a perfect recipe for a bubble, but it will take higher interest rates or weak earnings to break this dynamic.

Globally markets are in a classic inflationary boom. Fiscal and monetary conditions in all major economies are loose. The US has abandoned DOGE and embarked on an aggressive stimulus package, further fuelled by the Federal Reserve starting to cut interest rates. In Europe nearly all countries are expanding their fiscal deficits, with a particularly significant boost in Germany, accompanied by the ECB also cutting rates. Japan is discussing its own fiscal easing whilst keeping its interest rates well below inflation. China has a budget deficit of 10% this year, while its interest rates are at record lows. These loose financial conditions are reinforced by low energy prices. A further boost is the falling dollar, which is highly stimulative for Emerging Markets. Markets reflect this. The financial, industrial and commodities sectors are outperforming, and Emerging Markets are outperforming Developed Markets. The fall in the dollar is encouraging investors into other parts of the world. The euro, for example, has gained 13.3% against the dollar this year. President Trump’s rhetoric, particularly on withdrawing the US defence umbrellas from Europe, and tariff actions may necessitate a deeper unity between European countries, creating a less nationalist and more pan-European approach. This could result in significant cross-border consolidation in sectors such as defence, financials and telecoms to create European champions which invest locally and compete globally. National interests make this hard to achieve but there have been tentative moves in this direction, and a precedent from the 1970’s that proves this can be accomplished is Airbus, which was formed as a strategic response to Boeing. For Emerging Markets, the weaker dollar is crucial due to it leading to lower import costs and rate cuts which improve growth. Investors have been and are underweight, so this year’s strong performance is partly adjusting that, as investors reweight to this neglected area. Furthermore, Emerging Markets have followed far more orthodox policies than elsewhere so the foundations for strong economic growth and stock market performance are in place.

Entering the final quarter of 2025 there is a sense that markets are complacent. The strong performance of gold reflects this, particularly as a haven against a blow up in European sovereign bonds. After such a strong market there are pockets of overvaluation, and any disappointment on growth or AI would leave markets vulnerable, particularly in the US. However, while bonds enjoy more yield than previously, the returns remain unattractive, and cash is being slow roasted by Central Banks fixing interest rates at negative real yields. This background is forcing investors into stock markets where there remains a strong earnings story. While these conditions endure markets are likely to continue to rise.

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Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

July General Market Comments

«The Magnificent Seven» – The Clash, 1980

“Gimme Honda, gimme Sony, so cheap and, real phony” goes Joe Strummer in this legendary song from the Clash. We could transpose this into “Gimme Tesla, gimme Meta” today, as those two stocks stand among the magnificent seven performers of 2023 so far (with Alphabet, Microsoft, Amazon, Apple and Nvidia); the difference is that they don’t seem phony, and, for most of them, they’re far from being “so cheap”. In fact, these seven companies contributed to more than 55% of the performance of the S&P500 this year, which means that we could easily talk about a S&P 7 versus a S&P 493.

July 2023 has been a good month, again, for all risk assets: the MSCI World added 3.3%, the S&P500 3.1%, the Stoxx 600 2% (but the euro rose 0.9% versus the greenback), the Topix 1.5% (the Yen being up 1.5% versus the dollar after the change of tone from the BoJ regarding its yield curve control), and finally Emerging Markets caught up with a 5.8% return.

Styles reverted a smidgen on a global basis, with the MSCI World Value advancing more than the MSCI World Growth (3.7% versus 2.9%). One can still feel flummoxed when looking at the performance gap between both indices this year, Growth being up 30.2% versus a meagre 6.3% for Value. All hopes of a return to the mean between styles have been dwarfed in 2023.

July has also been very profitable for Credit, again, as the Itraxx Crossover added 1.5%, for Commodities (Gold up 2.4%, Oil 15.8%), which finally leaves Government Bonds as the only outliers with rising yields overall: +12 bps for the US 10 year, +10 for Bunds and +21 for JGBs.

That’s it for this month’s Market Comments, stay tuned, markets never skip a beat.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

April General Market Comments

“Jump around” – House of Pain, 1992.

Should we “Jump Around” as the classic House of Pain’s song recommends? Perhaps, because looking at most financial markets’ year to date returns gives many reasons to jump around, especially in the highly uncertain economic and geopolitical environment investors have to face in 2023; even more if we go back at the end of 2022 when the investment community looked forlorn after such a poor year.

At the end of April 2023, the MSCI World is up 8.96%, the S&P500 8.59%, the MSCI Europe 10.08% and the Topix 8.76% (the only laggard in equities being the MSCI Emerging Markets but it’s still up 2.16% year to date); Credit also glows, with the Itraxx Crossover up 4.79% for the year so far; Government bonds have their say, with US 10 year yields down 45 basis points in 2023, German 10 year 26 bps and Italian 10 year 70 bps. What about Commodities? It’s not as straightforward: some rise, like Gold (+9.1% year to date), some fall, like Oil (down 4.34%).

With these numbers we can draw a logical chain of events: economic activity is expected to slow down, hence a probable peak in Central Banks’ hawkishness quite soon, with long term yields coming down. The latter have a huge impact on valuations, which, unsurprisingly, are on the rise again; to wit, the more expensive MSCI World Growth humiliates the cheaper MSCI World Value in 2023 so far (+16.58% for the former, +1.94% for the latter). Slowing economic activity and lower yields favours Gold, at the expense of Oil, which explains the opposite fate of the two commodities.

Finally, the market seems to selectively worry about a possible banking crisis in the US and its ripple effects across the globe. Financials underperform but don’t collapse overall.

“Jump up, jump up and get down” says the song; we hope markets don’t drive us down too much anytime soon!

That’s it for this month’s Market Comments, stay tuned, markets never skip a beat.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Notes on Investment Policy Conference 10 January 2023

Notes on Investment Policy Conference 10 January 2023.

Presentation by Louis Gave of Gavekal

2022 was an unusual year. For the first time in decades OECD bonds became positively correlated to equities, and both fell dramatically. However, there were signs that markets were beginning to move in a different direction to that of the last decade. Technology stocks had a poor year and there is little sign that this will reverse. Meanwhile Emerging Market bonds and equities outperformed their Developed Market equivalents. This was particularly noteworthy given the strengths of the US dollar and the China lockdown. The one sector to perform well was energy, and with Russia’s invasion of Ukraine energy is likely to continue to dominate headlines. Gold also started to perform better after a long period of drift, and this may be signalling the end of the dollar’s supremacy.

In 2023 China’s reopening of its economy after three years of strict lockdown will be the most important macro event of the year. China’s stock market has suffered a 40% decline relative to the World Index since 2012, and even more against the rampaging US markets. But the outlook is much better. The Chinese market has started to recover, pushed by the Chinese retail investor. Chinese households have the most cash in the bank ever because of their inability to spend during the last three years. This cash hoard is estimated at RMB14.8 trillion. There is massive pent up demand and mortgage and auto loan rates are low, which will stimulate consumption as the Chinese population is released. Following years of poor performance foreign investors have given up on China, so the marginal seller that has accounted for recent underperformance has disappeared.

The reopening of China is inflationary. It is likely that the same pattern will occur in China as took place in the West following their re-openings. That is there will be labour shortages as the return to work is interrupted by waves of Covid. Companies, particularly manufacturing ones, will need to overstaff to cover sick leave absences. This will make labour markets very tight, and lead to periodic supply issues. China’s recovery will also be positive for energy demand. Energy supply is already tight and demand will rise with the recovery. There has been a geopolitical shift as Russian oil has been redirected to China, away from the West. The blowing up of the Nordstream pipeline has forced Russia to turn East. China will enjoy an advantage as it is able to buy oil at a discount to world prices. This applies to all commodities and because Russia is the world’s largest commodity exporter and China the world’s largest commodity importer, the fact that they are dealing off market will make pricing opaque and commodity prices will probably be more volatile.

The message for world markets at the start of 2023 is that everything from China looks inflationary. China’s poor handling of Covid means that it has to make a success of its reopening. This will lead to higher commodity prices, higher wage growth, and more demand. This view is in contrast to the general view that inflation will come under control during 2023. The long period of disinflation looks to be over, and we are entering an era of inflation. This has significant implications for portfolios. Most portfolios are set for disinflation – they are full of bonds and technology stocks. In an inflationary world bonds don’t offer protection. Portfolios need to adapt to reflect the new world. The outperformance of Emerging Markets, commodities and financials point to the new areas of leadership.

2022 looks like an inflection point. The winners of the last decade look tired. The Chinese reopening should spur an outperformance of Emerging Markets over Western ones. The US market looks expensive relative to both Emerging Markets, Japan and Europe. There are also signs that the US dollar may be rolling over. Over a longer view investors should be looking to position themselves to benefit from the decarbonisation theme, the recovery of financial stocks and outperformance by precious metals. The areas to be more cautious include the US dollar, bonds, and bond proxies such as real estate and large cap growth stocks.

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August General Market Comments

« You gimme fever, and a cold sweat » – James Brown, 1970

Like in the 70s, markets are giving us cold sweats on a regular basis since the beginning of the year. And fever sometimes, when they rebound sharply. August was a perfect illustration: after a red-hot July (+7.9%), the MSCI World roared until mid-month, adding more than 3.7% at some point, but miserably tanked thereafter to close the month with a -4.3% return.

Forget about what’s happening on the ground in Ukraine: it’s all about politics, from Governments and Central Banks. The politics of Energy, with Russia clearly willing to clamp down gas supplies to Europe and the panic this triggers on Electricity prices; the politics of Trade, with the US putting more and more limits for US corporations to deal with China when it comes to sensitive stuff (semiconductors for example); the politics of Climate, with countries all around the world thriving to reduce their carbon emissions; and, perhaps more importantly, the politics of Central Banks, with the Fed deliberately freaking out investors by announcing pain down the road, as its monetary policy will be tougher for longer.

A relatively pleasant earnings season has vanished very quickly in people’s minds, the focus being now on the consequences of Jerome Powell’s stubbornness. Soft landing? Soft recession? Deep recession? The worst situation for markets in general is when there are big uncertainties; among these, the first and foremost is the magnitude of the hiking cycle by the Fed: when will they stop, and at what level?

All this is too much for markets to stand still. The second half of August was painful, to say the least, and all major assets were down at the end of the month: as mentioned, the MSCI World lost 4.3%, more or less like the S&P 500 (-4.2%), the MSCI Europe was down 5.2%, World Value 3.3%, World Growth 5.4%. The Japanese Topix rose 1.2%, but the Yen tumbled a further 4.1% versus the USD, and is down a whopping 20.5% this year!

No respite on Government bonds, as the US 10 year rose 54 bps and the 10 year Bund 72 bps, while credit weakened again: the Itraxx Crossover fell 2.6%. Gold lost 3.1%, Oil suffered its worst drawdown this year with the WTI down 9.2%.

That’s it for this month’s Market Comments, stay tuned, markets never skip a beat.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Chart of the Summer – When the FED tightens, there is (almost) no place to hide

When the FED tightens, there is (almost) no place to hide

So far, 2022 has been a tough year with many headwinds in capital markets: Russian invasion of Ukraine, new Covid cases in China bringing partial lockdowns, increasing energy and food prices, rising inflation, etc… but, if we had to just name one, we would say that the FED tightening process is the most consequential. The old sentence “Don’t fight the FED” has never been so true. During the last 4.5 months, the FED has increased its official rate from 0.25% in mid- March to 2.5%.

TRADITIONAL ASSET CLASSES:

EQUITIES: High valuations, higher discount rates and lower expected economic growth have made equities lose USD19 trillion in 7 months to deliver a -12.9% High growth stocks with demanding valuations were the most vulnerable.
BONDS: All bond prices have adjusted to the new reality after the FED hiked rates. Unfortunately, bonds and equities became highly correlated again and the world bond aggregate lost 6.7%, which is a very important loss for an asset class that is also known as “fixed” income.
REFERENCE TRADITIONAL BENCHMARK: 60% EQUITIES + 40% BONDS: This popular reference index has lost 10.4% during the year.

Was there any hope in the alternative asset classes to compensate for the poor performance in the traditional portfolios? Not much:

HEDGE FUNDS. We used the daily index, as the most common indexes are still not available as of 31 July. At least the -4.5% returns did not look that bad, although there were large differences between the more conservative ones (relative value, macro, arbitrage, etc) – which were slightly negative – and the long/short, who did not perform well, specially because they continued with a growth bias.
PRIVATE EQUITY: Its returns are not available yet, so we took as proxy the Index with the listed private equity companies. As private equity is “somehow” a leveraged version of public equities, the proxy we are using posted a -22.0% Venture Capital suffered more than others with the fall of growth stocks.
REAL ESTATE: Its returns are not available yet, so we took as proxy the FTSE EPRA Nareit Global REITS Net Tax in USD. Real Estate is obviously sensitive to interest rates also and this market took a hit of 13.7%.
The only bright spot with a +35.3% performance. Interestingly, the energy subindex is the only one that was positive, as Agriculture, Industrial Metals and Precious Metals were flat or negative. Oil and Natural Gas were also going up before the Ukrainian conflict, and the invasion exacerbated the market.
BITCOIN: The whole crypto market has gone from a USD 3 trillion market to about USD 1 trillion. Despite the different drivers of this market, it has finally become highly correlated with risky assets (Nasdaq) and has tumbled 48.6%.
GOLD: Traditionally a good hedge against inflation, it has not been the case this year, although we may say that -3.5% is a decent performance compared to other assets performance.

Unfortunately, we have seen that only energy has produced positive returns this year, and the rest of the assets had negative or very negative returns. Investors still have 5 months to recover these losses, navigating in an environment that does not provide too much diversification.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.