Recalibrating the path – Counterpoint July 2026

Staying constructive but watchful

The first half of the year has shown the importance of staying invested during periods of uncertainty. Geopolitical tensions, a spike in oil prices and changing policy expectations all added to the uncertainty. Yet economic activity remained resilient and corporate earnings generally exceeded expectations, helping support equity markets.

Our central investment view hasn’t changed. We believe that equities still offer long-term return potential and remain tactically overweight as AI, government spending and a recovery in manufacturing should support corporate earnings over time.

However, strong returns naturally change portfolio weights, valuations and future expected returns. So, rather than letting positions grow unchecked, we use periods of strength to rebalance portfolios, which keeps risks aligned with our long-term objectives.

Taking some chips off the table

Against this backdrop, we have modestly reduced our strategic equity allocation. This doesn’t signal a change in our outlook or concern about an imminent downturn. It simply reflects rebalancing and some profit-taking after a prolonged period of sustained equity market performance.

After such a strong rally, future returns may rely more on earnings growth than on expanding valuations. That makes prospective returns somewhat less compelling than they were earlier in the rally.

Reducing equity exposure modestly allows us to realise part of the gains while maintaining meaningful upside participation and continuing to compound returns if markets rise further.

Cash and bonds deserve another look

The proceeds from our equity reduction have primarily been invested in money markets, with a smaller portion also invested in European government bonds. For the past decade, cash has offered little return. But that is no longer the case.

The recent ECB rate hike has pushed short-term interest rates higher, meaning cash can offer better returns while preserving flexibility. Government bond yields now also offer levels of income that were largely absent in the years following the global financial crisis.

Bonds also play an important role in diversifying portfolios. If growth slows or market volatility increases, they can help mitigate overall portfolio risks. Higher yields mean that investors no longer have to sacrifice as much return potential when holding cash and government bonds.

A more selective approach to Europe

European equities have performed well this year, supported by improving sentiment and expectations of higher fiscal spending, including in sectors such as defence, infrastructure and energy self-sufficiency.

We still think these themes present opportunities for investors over the long term. However, valuations now reflect much of this optimism. As economic growth across Europe remains weak, those valuations now appear increasingly high relative to history.

Rather than maintaining broad market exposure, we have increased the use of actively managed European equity strategies. We think active managers are better positioned to identify companies with sustainable earnings growth, while avoiding companies where valuations have become detached from underlying fundamentals.

We have also slightly reduced our US equity exposure. AI investment and earnings growth remain solid, and we don’t expect further US dollar weakness in the near term. Therefore, we think it’s right to maintain meaningful exposure to US assets. However, after such a strong rally, we believe a modest reduction is appropriate, locking in gains while maintaining a tactical overweight.

Private credit under scrutiny

Private credit has been one of the strongest-performing asset classes in recent years. Higher interest rates, limited default activity and strong investor demand for alternative sources of income have supported the sector.

Nevertheless, as the credit cycle matures, we believe it is appropriate to reassess the balance between return potential and downside risk. Financing conditions remain more restrictive than they were a few years ago, and periods of stress in one segment of private markets can affect sentiment elsewhere. While these risks remain relatively contained, they warrant closer attention.

We have not seen signs of deterioration in the private credit investments we hold in portfolios. Even so, we think now is the right time to reduce exposure given the broader market environment.

Discipline over prediction

Successful investing is rarely about reacting to headlines. More often, it’s about making measured adjustments that gradually improve the balance between risk and opportunity as markets evolve. Our latest portfolio changes reflect exactly that philosophy.

We remain positive on equities over the long term. Tactically, we continue to favour the US and emerging markets, where growth and earnings prospects appear stronger. At the same time, higher yields in cash and high-quality government bonds justify a more balanced allocation. A smaller exposure to European equities and greater selectivity within it, along with a more cautious stance on private credit, should help strengthen portfolio resilience.

Taking some chips off the table does not mean leaving the game altogether. Rather, it means preserving gains through disciplined management. It aims to position our portfolios to capture opportunities while mitigating risks as the economic cycle matures.