Third quarter performance was impacted by oil price volatility following the breakdown of the ceasefire between the US and Iran, a cooling of sentiment in the AI spending theme, rotation across industrial sectors and a rapid rise in yields of sovereign bonds.
With Brent crude oil finishing the quarter at over $100 a barrel, it was unsurprising to see the energy sector deliver double-digit returns. It was interesting to see some reversal of fortunes around the AI spending theme, as following an extremely strong first half of the year, semiconductor stocks suffered double-digit falls. This was mirrored by both the Magnificent 7 and software stocks, which, having struggled due to question marks over their business models as a result of AI spending and usage of the technology, experienced corresponding rises. The high weighting of the Magnificent 7 also meant that this group of stocks alone was pretty much responsible for driving the S&P 500 higher. Conversely, we saw Emerging Markets decline over the quarter, due to the high concentration of semiconductor manufacturers, such as Samsung, in many indices.
The UK, with its high exposure to oil producers and banks, was one of the best-performing markets, as the latter stand to benefit from higher interest rates. European equity markets lagged, as we saw high inflation, caused by high energy prices, leading to a further rate rise from the ECB. Japan, with its exposure to AI-related hardware manufacturers, performed in line with Emerging Markets, whilst the economy also had to contend with increased volatility in its currency, as political pressure from the US to strengthen the yen increased. Indeed, we saw coordinated action in the currency markets from both the US Treasury and the Japanese Finance Ministry, in an attempt to achieve this, as well as a rate rise to a multi-decade high by the Bank of Japan.
Whilst we saw mixed performance among equity markets, in global bond markets, the direction of travel was very much universal, as rising bond yields caused bond prices to decline globally. Whilst the moves were universal, they were most extreme in sovereign debt issued by high debt economies such as the US, France and Japan. Yield rises, having previously been limited to longer dated, i.e. 30-year bonds, extended to shorter-term paper, further putting pressure on those governments’ finances. Corporate bond yields rose as a consequence, but the premium required by these borrowers only rose slightly, suggesting investors were less concerned about corporations’ levels of debt than they were governments.
Given the greater exposure to the US and UK equity markets in higher risk portfolios, these managed to deliver positive returns, but lower risk portfolios struggled due to their higher bond exposure, with the most cautious portfolios ending up in slightly negative territory. However, despite a more challenging quarter, all portfolios remain firmly in positive territory year to date.
Rockhold Asset Management October 2026