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Introduction
The third quarter of 2026 saw global markets deliver mixed returns against a backdrop of renewed geopolitical tensions, rising energy prices and persistent inflationary pressures. While resilient corporate earnings continued to support equities in several major markets, disruption to global energy supplies and rising bond yields weighed on investor sentiment. Regional performance varied, with UK mid-cap stocks and Japanese equities showing particular strength, while European markets and parts of Asia struggled.
As we approach the final quarter of the year, ongoing uncertainty around inflation, interest rates and geopolitical developments reinforces the importance of maintaining a well-diversified, long-term investment approach.
Summary
UK: UK equities delivered positive returns, with mid-cap stocks significantly outperforming larger companies. Rising energy prices supported the market, while persistent inflation, elevated gilt yields and political uncertainty remained key concerns.
US: US equities continued to make gains, supported by resilient corporate earnings despite rising bond yields and higher energy costs. The energy sector benefited from supply disruptions, while interest rate pressures weighed on more defensive sectors.
Europe: European equities declined as rising energy prices and renewed inflation concerns weighed on investor sentiment. Higher interest rates affected rate-sensitive sectors, while political and fiscal uncertainty in France added further pressure.
APAC and EM: Japanese equities performed strongly, supported by corporate earnings and continued overseas investment. Elsewhere, Asia Pacific and Emerging Markets struggled as weakness in semiconductor and AI-related stocks offset gains in China.
Alternatives: Oil and gas prices rose sharply following renewed disruption to Middle Eastern energy supplies, with Brent Crude climbing above $100 per barrel. Gold also strengthened as shifting US Treasury policy influenced bond yields and the dollar.
Sustainability: Sustainable investment funds saw renewed inflows, driven partly by growing demand for electricity infrastructure and energy security. Meanwhile, an intensifying El Niño raised concerns about agricultural production and potential food price inflation.
Performance: Portfolio performance was mixed, with higher-risk models outperforming more cautious portfolios as bonds struggled. Exposure to Japanese equities, UK all-cap stocks and global value supported returns, while diversification remains central to navigating continued uncertainty.
UK
The FTSE All-Share Index rose 2.43%* in Q3, though there was a marked difference between the large-cap FTSE 100 Index (+1.82%*) and the mid-cap FTSE 250 Index (+7.43%*). The All-Share is up 9.8% year-to-date, in what has been a steady but solid year for UK equity returns so far. These figures were driven in part by gains made in the energy sector as fossil fuel prices soared once more, having taken a brief downward turn. Markets were little-moved by the replacement of Sir Keir Starmer by Andy Burnham, though the forthcoming first budget of new Chancellor, John Healey, may change that. The reasoning behind the outperformance of mid-caps was multifactor, thanks in part to takeover activity,1 but also re-rating after heavy sell offs in recent months left the constituents particularly cheap on a relative basis on various valuation metrics. There was a broad rotation from highly internationally exposed companies into those more domestically focused; a characteristic more typical of constituents of the 250.2
The Bank of England held rates at 3.75%* on inflationary concerns stemming from potential supply chain shocks from the war in Iran, as well as generally stubborn domestic inflation experienced in recent periods. Gilts reached their highest yield in decades, posing a serious headache for Burnham’s government ahead of the budget as debt-servicing becomes a greater proportion of government expenditure
Europe
European equities lagged their developed market peers in Q3 – the STOXX 600 falling 1.4%*.3 While the energy sector produced strong results due to rising oil and LNG prices caused by Iran’s attempts to close the Strait of Hormuz constricting global supply, other sectors such as utilities, real estate and consumer discretionary fell. The European Central Bank raised interest rates by 0.25% due to increasing inflationary concern thanks largely to energy price shocks. Rising yields brought concerns around future growth as well as equity valuations, with rate-sensitive sectors such as real estate lagging. The growth figures remain resilient for now, as did the PMI, a key industrial activity indicator.4 The region also suffered compared to peers due having less direct exposure to the tech and AI trade, a sector which performed well but was unable to make any real impression on the benchmark due to its size.
In fixed-income, French sovereign debt pulled back further, with the 10-year OAT-Bund spread – a measure of the premium demanded by investors to hold French 10-year government bonds over the German equivalent – reaching its widest in over a decade.5 This due to investors seeing a significant degree of fiscal and political risk in France, as the government walks the tightrope of trying to tackle the large budget deficit in a politically digestible manner.
US
The S&P 500 returned 2.13%*6 on the quarter, posting multiple record highs and continuing to outperform many other major developed markets in a resilient year to date amid myriad geopolitical and macroeconomic landmines. The index has returned 13.86%* YTD as of the end of Q3, as earnings continue to grow despite an increasingly hostile financing environment and elevated energy prices. Investors looked beyond the noise of volatile fixed income markets, confident in the ability of many companies to grow earnings and remain profitable in a higher-rate environment. Higher-yielding sectors such as utilities suffered, becoming less attractive on a relative basis as a result of rising bond yields,7 while the energy sector was boosted by oil prices and Hormuz-driven global supply disruption.
The yield on 30-year US Treasuries reached its highest level since 2002, deepening budgetary concerns, with the deficit reaching $432bn in July.8
Asia Pacific and Emerging Markets
Japanese equities were the standout performer in Q3, supported by strong company earnings and continued enthusiasm from overseas investors. Longer-term corporate-governance reforms such as increased share buybacks have also helped, and as a result the TOPIX returned 3.8% in Yen terms over the quarter*. The Bank of Japan joined the Federal Reserve and the European Central Bank in raising its interest rate. September’s decision brought the policy rate to 1.25%, the highest it has been since 1995, as the country faces increasing inflationary pressures.
Asia Pacific (Ex. Japan) equities and Emerging Markets slowed, hindered by a sharp pullback in AI-related semiconductors and memory names during July, affecting South Korean and Taiwanese indices. These forces outweighed an impressive month for China, which returned 9% in July, measured by the MSCI China index in USD terms. Chinese equities remain volatile; however, quarterly returns of 3.7% (USD) were not enough to drag broader indices into the green in Q3. MSCI Asia Pacific Ex. Japan and MSCI Emerging Markets finished roughly -0.2% down over the quarter in US Dollar terms*.
Alternatives
After an initial pullback to near pre-war levels amid optimism over a ceasefire and peace talks in the Middle East, the subsequent collapse of those talks sent Brent Crude soaring back above $100 per barrel.9 This led to forecourt prices similarly rising, with diesel now on average costing more than £2 per litre in the UK for the first time ever.10 While there was an uptick in traffic traversing the Strait of Hormuz in September, continued strikes by Iran in the Gulf and its proxies in the Red Sea meant the oil benchmark remained elevated throughout the rest of Q3, with a fair amount of volatility to boot. Natural gas benchmarks were similarly elevated, with production capacity in the gulf states significantly dented.
Gold rose in August after the US Treasury announced an increase in long-dated debt purchases, which would have the effect of suppressing yields and therefore reducing the return on US assets and weakening the dollar.
Sustainability
Recent Morningstar research shows Global sustainable funds, excluding China, attracted an estimated $3.7 billion in net inflows in Q2. European inflows continued, although at a slower rate, with $3.5 billion of inflows. The US reversed Q1 outflows, with $3 billion inflows in Q2 after 14 consecutive quarters of outflows. Interestingly, passive investments proved more popular, while active strategies saw $7.8 billion of outflows. Thematic funds such as those around Energy Demand and Electric Infrastructure drove investor flows. First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index ETF recorded its 4th quarter of inflows, and it targets companies involved in strengthening the electric grid to better support surging demand from artificial intelligence usage and data centres, along with fluctuating supply from renewable energy sources.11 Much of this demand stems from the investment in AI/Data centres, and the importance of energy security following escalations in the Middle East.
El Niño is firmly established and will likely intensify into a very strong event in the coming months, say the World Meteorological Organization (WMO), with forecasts showing a near 100% likelihood that it will persist through February 2027.12 The name ‘El Niño’ is widely used to describe the warming of sea surface temperature that occurs every few years, typically concentrated in the central-east equatorial Pacific, and can have large economic consequences due to the effect it has on temperature and rainfall patterns – and therefore crop production. Increased food inflation could be a large consequence of this, especially if we see the continued closure of the Strait of Hormuz (a large amount of fertiliser passes through this trade route – 30% of global nitrogen and 50% of sulphur). Some estimates on the impact on crop production are very concerning. Australian wheat production could fall 20-60% YoY, global cocoa and coffee output could fall 5-15% YoY, and many regions could face serious shortages.13
Portfolio Performance
It was a mixed quarter for our own performance. The higher risk models finished in a better position than the more cautious models due to their lower exposure to bonds – an asset class that struggled in Q3 as the inflationary outlook was reassessed. Cash/ultra-short, high yield, and emerging market local currency bonds fared slightly better, particularly against developed market sovereign bonds. Our sizeable exposure to Japanese, all-cap UK, and global value all helped.
The sustainable models lagged the conventional models over the quarter, although this looked more to do with sector/style differences rather than any negative ESG catalyst. Commodities and the energy sector had a strong quarter, and value stocks broadly outperformed growth stocks – both of which would have worked against the sustainable models.
Overall performance – particularly year-to-date – looks strong, and our more global positioning looks to be benefitting us as performance broadens across markets. Sufficient diversification looks essential as we head into the final weeks of the year. How far the energy shock feeds into inflation, important central bank interest rate decisions and government budgets, economic data, etc., all make for an interesting final quarter.
2. https://www.investec.com/en_gb/focus/investing/investec-equity-capital-markets-review-july-2026.html
*All return data sourced from Morningstar Direct
4. https://tradingeconomics.com/euro-area/manufacturing-pmi
*All return data sourced from Morningstar Direct
7. https://www.schroders.com/en-gb/uk/intermediary/insights/quarterly-markets-review—q3-2026/
8. https://nspgroup.com/insights/investment/q3-2026-market-outlook-quarterly/
9. https://www.tradingview.com/symbols/UKOIL/?timeframe=6M
10. https://www.ajbell.co.uk/news/articles/uk-diesel-price-hits-record-high-official-government-data
13. https://bondvigilantes.com/blog/2026/08/of-anchovies-and-blueberries-why-el-nino-matters/
