Traditionally, July and August are sleepy months in the market, but this year was different – new themes began to emerge and areas of the market that seemed to have lost direction stirred again. So where are we now?
Theme one: Rising bond yields
Long-duration bond yields have crept higher globally through September. Debate on the cause has ranged from government fiscal profligacy (ominous) to higher nominal growth expectations (manageable).
Higher inflation from energy disruption, colliding with high Western government spending commitments, is causing demands for higher rates of return. While energy remains the main source of inflationary pressure, agricultural commodities are also contributing.
Slow progress in resolving the conflicts in Iran and Ukraine makes energy one of the few near-term investment certainties. Even so, we plan to start exiting our traditional energy holdings once share prices rise to attractive levels.
The long-term future for pure-play energy stocks is unattractive now that there is both the will and the technology to roll out renewables and nuclear power worldwide.
Rising yields also mean that the multiples of growth stocks are being punished. Investors increasingly want to see cashflows today and view high debt levels as dangerous.
Lower multiples and lower debt are evergreen themes for us, and current conditions mean the market is slowly turning our way.
Theme two: Debasement and a weakening dollar
In response to rising yields, the US needs to act. Treasury secretary Scott Bessent and Fed chair Kevin Warsh are playing out a good cop/bad cop double act with Bessent wanting to control yields and Warsh threatening rate hikes.
The result of this battle of wills is that the dollar must weaken, while hard assets prevail. The positive reaction in gold, as a hedge against financial market meddling by Bessent, is just one example.
We agree, but the bigger picture behind Bessent’s intervention and the weakening dollar is how these factors affect all kinds of commodity prices – and their producers.
When the dollar weakens and commodities go higher, companies that produce, process or provide metals, grains and energy will increase their margins as they pass on higher commodity costs.
With rising bond yields and a weakening dollar resulting largely from the government’s need to spend on priorities such as infrastructure, defence and power, we are prioritising the industrial, materials and energy companies that stand to benefit from this spending and hope to reap a double benefit.
Theme three: Anti-data centre sentiment vs. longer-term technology adoption
Sentiment toward AI has moved rapidly from disbelief to curiosity to euphoria to scepticism and now to concern in just a few years. As the big AI innovation labs, OpenAI and Anthropic, speak of technology so revolutionary that it could displace millions of jobs, people have unsurprisingly grown distrustful of AI.
The midterm elections have long been seen as a test of Trump’s popularity, but increasingly they are also becoming a referendum on AI. As states start to implement restrictions on data centres, politicians of all persuasions, sensing their constituents’ growing angst, are vocally expressing their opposition too.
The data centre trade is therefore in flux as investors worry about future returns for all those companies involved in the physical buildout. Over the summer we reduced our exposure to related stocks and sit underweight for now.
However, technology cycles tend to come in waves. As businesses start to see the long-term benefits, we believe those that embrace and implement AI early, particularly smaller companies, will soon be making productivity gains that improve their margins and their earnings.
Hard assets with lower multiples, companies with manageable debt and management teams that can see the benefits of using AI tools should be well placed to navigate market volatility for the remainder of 2026 and beyond.
Dan Scott Lintott is an assistant fund manager at De Lisle Partners. The views expressed above should not be taken as investment advice.