The Viewpoint: An action-packed first half of the year

Seeing the wood from the trees

The pace of events in the first half of the year has left most market participants needing a well-earned summer break.Unfortunately, whilst many of us go away, markets, and the events which shape them, will not. We are still seeing tariff uncertainty and geopolitics continues to fill our newspapers daily. Amid all of this, what are the definable trends and events which may shape markets in the coming years?

First, a few reflections on the first six months of this year. For all its bluster, this has been a positive time for equity investors. As of the time of writing nearly all equity markets are positive for the year and some, such as Europe, are up over 20%. Even the US, much maligned as the centre of AI concerns and the end of US exceptionalism (maybe) is higher by a mid-single digit percentage. Liberation day, when Trump initially announced tariffs, proved to be a good buying opportunity.

The resilience of markets comes down to a few things. First, the underlying economy – which supports corporate earnings – has remained robust. There has been no notable slowdown in economic growth so far. Second, despite concerns around it earlier in the year, AI has remained a good theme to invest in. There remains high demand for AI semiconductors and those companies developing AI products remain optimist about their transformational nature. Finally, there are signs that Europe and Asia are taking more responsibility for their own growth by stimulating their economies – one reason their equity markets have been so strong. In totality, this has resulted in a profitable environment for companies and investors.

Looking under the bonnet, there are a few trends which if they were to carry on would challenge the consensus positioning of many investors, which is typically long the US and long US technology. First, the US dollar has been persistently weak. This impacts the value of investments made in the US, such as US equities. There are many theories as to why the dollar has been weak, with perhaps the most compelling one being the gradual removal of its status as the so-called global reserve currency. Most trade globally has the US dollar as one side of it, and it also comprises most foreign exchange reserves. There is now the option to pay for key goods such as oil in other currencies such as the Chinese currency, the renminbi, and this is being increasingly used. Also, as the US becomes more adversarial, there is less incentive to own US assets, which also reduces demand for US dollars. Of course, no one knows if this trend will continue, but if it does it will create a headwind for US assets, and for the profits of non-US companies with large US businesses.

Another trend is the outperformance of non-US equity markets. The US stock market has outperformed European and Asian ones for so long that most investors have not seen it underperform. It has though, particularly in the 2000s when emerging markets performed much better as China joined the World Trade Organisation. This more recent underperformance has been badged ‘the end of US exceptionalism’. Of course, as this became consensus earlier in the year the US stock market started outperforming again (markets tend to do what causes the largest number of investors the most pain). That said, the US has still been an underperformer this year. There are numerous definitions of exceptionalism – including innovation, access to commodities, depth of capital markets, education systems and rule of law – and the US remains strong against most of them. However, there has been some degradation for political reasons and that has happened at the same time as Europe and Asia are showing a greater willingness to set their own growth agendas. Markets move at the margin, and at the margin the US has become a bit less exceptional and other markets a bit more attractive. Again, no one knows if this will continue, but if it does investors are unlikely to have enough invested in non-US markets.

Finally, AI remains a significant point of debate despite its recent resurgence as an investment trend. Scepticism about AI started when a Chinese company, Deep Seek, released an AI product which was seen to be better than those developed by the major US technology companies. It also used a lot less processing power and electricity. This suggested that much of the investment going into AI, from data centres to electricity grids, would be unnecessary. Since then, markets have reverted to believing that AI investment will be needed as the complexity and frequency of new AI tools increases. Whilst I would be in the camp of being an AI believer, it is not yet a certainty. The underlying economics of AI have not yet been established, and the amount of incremental revenues needed to justify the scale of investment currently occurring is significant. Should adoption of AI be slower than expected, perhaps as it proves to be less useful than hoped, it would result in a material repricing of a range of (mainly US-based) investments as happened during Deep Seek. It is right to keep an open mind on AI.

The future path of the US dollar, non-US markets and AI will in totality have a material impact on investment markets going forward and establish the investment trends for the coming years. For those with significant US exposure, they will be hoping dollar depreciation is temporary, that Europe and Asia don’t wake from their slumber, and AI is all it is hoped to be. Should one or all of these assumptions prove incorrect, a significant reallocation of assets to non-US may occur. My own view is that sources of performance will be broader in the future than in the past, but to write off the US and AI would be a mistake. Investing is not ‘either/or’, it can be ‘all’, and having balance is a good approach with today’s uncertainty.

Forecasting is hard

Perhaps the key lesson from the first half of this year is that forecasting is hard. To predict what is going to happen, and how markets will respond to it, has proven almost impossible. If it had been known at the start of the year that aggressive tariffs would be introduced and the US would bomb Iran, it would have been hard to be optimistic. That these events have occurred and it has been a positive time for investors shows, once again, that optimism can be more rewarding than pessimism. And that micro factors beat macro. Despite all the uncertainty, companies continue to innovate and find new ways to grow. No CEO we meet spends much time thinking about things they can’t control. They come in every day motivated to find opportunities as opposed to threats, and this is a good mentality for investors too.

The second half of the year will undoubtedly have more surprises in store for investors. As always though, we believe markets will find a way through with both patient optimism, aligned with sensible risk taking.

For professional investors only.  This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.