Q2 2026 investment update

Transcript

Tom Merchant:

Hi, good afternoon or good morning, depending on what time you’re tuning in to listen to this. Welcome to our Q2 investment update. My name is Tom Merchant. I am a partner and business development manager at Saltus, and I’m delighted that we are joined today by our chief investment officer, David Cooke. Afternoon, David.

David Cooke:

Good afternoon, Tom. Hello, everybody.

Tom Merchant:

Hi. So for the next so 15 or 20 minutes, we’re going to have a quick retrospective look back at what’s gone on in the last quarter, trying to pick apart some of the things that maybe drive markets or see whether things behaved as we would’ve expected and then obviously fire a few more questions at David. That being said, obviously, if there are things that come out of this that you think, oh, I really wish they’d delve deeper into that or there are elements that are concerning me, as always, your investment manager or financial planner is always available for you to call or speak. And so please don’t view this as the only avenue to discover what we’re doing in portfolios. We’re very keen to send out more content and also to educate you guys accordingly, so please do reach out. So I suppose without further ado, what happened, David, what did Q2 give us?

David Cooke:

Q2 gave us in the end very, very, very, very strong returns, which might be a surprise. And I think if we go back to the end of Q1, if you remember in end of February and March was the start of the Iranian war and a big, big spike in the oil price, which was a shock to the global economy and markets spent a lot of March worrying about that and falling. And then the second quarter began in April and runs through to the end of June. And what happened was the market very quickly and steadily came to the conclusion that the war was going to end by summer.

And it came to that conclusion because of historical precedent. It came to that conclusion for hard reasons that munitions may run out or military objectives may be achieved, and you can’t keep up the initial pace for too long, or for soft reasons that maybe the Iranians couldn’t cope with hyperinflation and the Americans didn’t want this carrying on into the midterm elections. Whatever it was, the consensus formed pretty quickly that the war would not be a long-lasting affair.

And that conviction built steadily through the quarter. And as it built, it helped catalyse a rebound in sentiment from the depressed levels at the end of March. And if you put on top of that, the-war-is-over-type-feeling, if you put on top of that a global economy that was already in something of a cyclical upswing, so the economy was already strong, and then you supercharge it with a huge capital expenditure programme in the United States, but also around the world related to artificial intelligence infrastructure, then you had a lot of reasons for depressed risk assets in particular to recover because basically the external profit environment was so strong and expected to continue strong. So counterintuitively maybe because it was three months that were dominated by pictures of war, the actual asset market returns and most portfolio returns were really, really strong.

Tom Merchant:

Right. So then the dip and the negative impacts that it wars mostly felt in Q1. And even though it has been trundling along a bit through Q2, the sort of overall consensus was this won’t be around come the end of the year, so the markets started rebounding accordingly.

David Cooke:

Exactly. What people were concerned about is that it’s not so much how high the oil price goes as how long it stays up there that causes the damage. And don’t get me wrong, there’s plenty of damage and demand destruction out there. It was just manageable in the context of everything else that was going on.

And if we hadn’t had this shaky memorandum of understanding by the end of June through into July, then things would’ve got a lot harder and all that, if that assumption that the war was going to end didn’t prove to be true, then we would’ve reversed quickly again. So it’s a volatile period, but because we had the memorandum and the investors saw that coming from quite a long way away, there was a nice recovery and sentiment and then the other factors helped accelerate equities up.

Tom Merchant:

Perfect. And then I suppose after that maybe shock or I don’t know what the right word for it is, or events in Q1, did we move our portfolios at all? What was the effect of what we did in our portfolios at the end of Q1 leading into this? And then I suppose how did they fare?

David Cooke:

It’s a great question because there’s some principles behind this. We didn’t do a lot. In fact, the only thing we did at the end of the period after oil had come right back down was add some oil positions to the riskier portfolios as some form of protection in case the whole thing flared up again. But during the quarterly reporting period, we didn’t do anything of note. And this goes to one of the key reasons you can or key principles behind portfolio construction, which is you rarely see the nasty event coming in advance and certainly not perfectly. So you’ve kind of got to prepare for everything.

And we had all risk bands prepared, taking the correct amount of risk for quite a wide amount of eventualities. We had expected a general environment where we could make returns but not as good as in the last three years. So we were very, very diverse. And in some places somewhat defensive. And that led us ride the bump, so to speak, of the initial shock. And I think the other lesson would be that you would’ve thought that if you are of a mind to just try and change things in the middle of a firestorm, you’d probably have gone more cautious in the middle of this and then missed out most enormous recovery.

Tom Merchant:

Can we touch on that a bit? So you said “the most enormous recovery.” So I think I suppose probably because things were so in the headlines anyway, so negative in Q1 that I think maybe it might’ve passed a lot of people by, but we had very buoyant recovery in Q2.

David Cooke:

Yeah, the portfolios, the most cautious one, which we talk about a little bit because the bond market didn’t particularly like the inflationary consequences of everything going on, but that would still have managed to do two, 2.5% in the quarter. And the risky portfolios would’ve been up at 10, 12%. So that’s quite a big quarter and it’s strong.

Tom Merchant:

I suppose it’s testament to that conversation that I suppose a lot of advisors listening in have with their clients quite regularly that it’s very hard, and it’s quite an emotional thing when one reads the headlines to keep your powder dry and to try and stay invested in periods of that time or equally even to allocate your money towards the markets when all the headlines are negative, but actually goes to show that in that period of time it would’ve been very beneficial.

So I think the other thing that I suppose has happened at the back end of this quarter that I think a lot of people listening in will be concerned with, so we’ve talked a lot about the US, Iran, the Middle East and oil, but maybe what’s dominating the front pages here is the labour leadership battle.

David Cooke:

Yes.

Tom Merchant:

So I know you’ve fielded a few questions already from clients, but has that affected portfolios? Has that affected our UK markets, global markets? What’s the general feeling towards Mr. Burnham?

David Cooke:

I think maybe we all start with a dose of humility because the UK footprint in global equity or global bond markets is about 4%, very roughly of the total. So 96% of the action and our attention is elsewhere if you have a global portfolio, which is what we do for our clients. So with that in mind, I mean obviously we all live here and it’s front and centre of the news flow, so it can feel a little bit more than its footprint probably deserves.

But to answer your question directly, the markets, be they gilt or sterling or equities to a lesser extent, are more concerned on what’s happening with the oil price and the general level of global interest rates than what’s happening with a change of leadership in the UK. A lot of that is because they have assumed, and it’s been confirmed by Mr. Burnham, that they’ll stick to the existing framework of obeying the fiscal rules, which are broadly seen as a set of sensible guardrails on governments doing anything stupid like spending way too much and not being able to fund it.

And if you’ve committed to that, then the rest is we’re waiting on the detail and at the time that we’re doing this, there’s no cabinet and there’s no detail on the policies. The only thing that’s been said so far is, to be frank, a little bit backward looking in that if the priorities are devolution and building council homes, then those are worthy long-term policies. But we are still a country with an awful lot of debt, reasonably high tax burdens, facing challenges on the technological front and the AI age. And answering that question is going to be a harder challenge for him and perhaps more relevance in the long run from what the small bits that he said so far.

But at the end of the day, global factors weigh more than local factors at the moment. As the local factors become more detailed and we see the policies and the spending priorities and the shape of the cabinet, then maybe we can get some marginal influence from the price of UK assets. But I would say also that these assets price in an awful lot of news in the sense that we have the highest borrowing costs as a government of all our peers and our equity market is one of the cheapest on the planet compared to its reasonable peers.

So there’s quite a lot of risk discounted in the UK, and we are experts in beating ourselves up. So I’d not be surprised if in the forthcoming asset allocation, we had a close look at UK assets of which we already have a reasonable exposure and maybe add some more.

Tom Merchant:

Fine. So Andy Burnham, not necessarily making huge waves. We’re just debating this across the desk. If he called up Donald Trump, do you think Donald Trump will know who he is yet? Or Gianni Infantino, are trying to get a red card overturned, do you think that he’d be part of that conversation?

David Cooke:

I wonder which one would be the easier conversation.

Tom Merchant:

Exactly that. So I think there’s something that came out there that I think someone raised a question last time, and I think it’s a really fair question. The price of oil is obviously one of the key drivers behind any economy. And while there isn’t an obvious knock-on effect in how much it costs to fill up your car, but do you mind maybe giving a brief summary around why oil is the key fundamental that underpins global economics? And that’d be just a couple of minutes on that would be really helpful just for that person to ask that question.

David Cooke:

Yeah. I mean, there’s a couple. If you take it globally again, most of the planet still relies on carbon-based sources for its energy and the energy intensity, the bang you get for burning a lump of coal is still very, very high or burning some oil. So our starting point is that this is becoming less of our story in the UK, but it’s still a considerable part of the planet’s story when you take in the Chinese, India, United States and so forth.

The second thing is that oil prices or oil or gas prices, which are closely related coming from the same wells, the same areas, are the marginal price setters and energy systems, not how much your electricity costs. And the mechanics behind how it gets to you and which parts of the generating system actually produce the electricity is all really, really complicated and differs country by country. But you always have at the edge of the system something that’s setting the price.

And in our case, it’s often a carbon, well, it’s gas, I think. It’s a carbon-based energy product because those are always the sources that are readily available and really easy to switch on in the middle of the night when there’s no solar or when it’s a calm day. And as long as you’ve got a price setting mechanism that’s got a lot of influence given to carbon, then it’ll always be important to you.

It’s the same thing when you think about your daily life and filling up your carbon petrol. The reason why it impacts so many people is that most people still have petrol or diesel cars. I mean, if you were getting it from a fully decarbonized grid in an electric vehicle, you might not notice it as much.

Tom Merchant:

Interesting.

David Cooke:

And then at the end of the day as well, maybe the final thing to say is there’s a world that we don’t often see, but we take for granted, the physical world, and we just assume that the energy and the petrol is there for us to take and we want it. But it has to get from the place where it originates to the power station or the petrol station. And those inventories and buffers and those systems of distribution can get clogged up.

And that’s the whole problem with the Iranian war in that a significant part of the world’s oil supply just got clogged up, just got taken out almost instantaneously. And you can run down your inventories to deal with that demand bump, which is what happened. But eventually they’re going to run out and you don’t have any more oil, then the prices will go up shortly because physically the highest bidder will pay to get the available supply. So, there’s lots and lots of reasons.

Tom Merchant:

Fine, understood. And then I think forward-looking, and I appreciate going into Q2, thankfully we were pretty well positioned and diversified to A, catch the upswing. Has that changed our opinion or have we tampered down any risk? Assets based on the fact that we’ve had, as you say, a monumental recovery within markets, have we taken any risk off the table for Q3? What’s our positioning?

David Cooke:

Well, we came into this year expecting a moderation in positive returns because we had three years of very strong returns. And in this environment, we’d expected the cost of money to go up mainly in America. Because economies were strong and inflationary pressures were high, we maybe needed a few more interest rate rises just to get on top of that inflation issue.

And then we had the war interruption, which complicated everything. And then that soon is a working assumption by the end of June, that’s less of an issue back to where we started. So we are still of the view that the glass is half full rather than half empty and that returns will trend upwards in a volatile fashion and will ultimately end up being okay, but less than they have been in the past.

So when we think about what we have to do now, the asset allocation’s actually next week. It might involve, as you say, because of the movements in equity market, what I call a bit of footwork, selling the expensive things. One of the ideas of kicking right on the desk is maybe taking some profits in the big technology companies that we have and rotating into some of what would be called more defensive sectors because there’s most enormous valuation gap.

And when you look at investing for the long run, one of the single most important factors is the price you pay for that asset at entry. And some assets, let’s call them defensive sectors, are very, very cheap. Some geographies, like the UK, are also very, very cheap. So there’s a few geographical and maybe intra-equity twists to do within the fixed income side. No, I think we got that right. We take risk where it’s highly rewarded. There’s some emerging market debt for nine, 10, 11% coupons. And then we compliment that with shorter data government bonds, which are less volatile but still have actually pretty decent returns.

And then alternatives, since we look at, at least 14 different types of alternatives, there’s always something to do because we don’t think all 14 of them are going to work spectacularly the whole time. So there might be a little footwork there as well.

Tom Merchant:

Perfect. I think that’s a really nice summary. Thank you, David. And I think if I could leave any clients with some sort of parting words, it would be the investment team have done really well this year. I think David’s naturally as he’s too long in the tooth, too pat-

David Cooke:

Oh, don’t tempt fate, Tom.

Tom Merchant:

Yeah, he’s too long in the tooth to ever pat himself or the team on the back but they’ve had a remarkable first six months of the year, and I think very, very commendably handled some of the volatility. And so yeah, we’re all really proud of them. And I think the other thing we always want to make sure we mention when we talk about the UK and the significance in global markets, that’s purely an investment position.

David Cooke:

Yes.

Tom Merchant:

We are fully aware that the headline’s implication of the changing tax environment, especially our retire clients or those nearing retirement, it is a stressful time when regime changes. And I think one thing I would say is don’t be a stranger to your advisor. We obviously will reach out to you during the budgets, but it’s something that we’re very close looking at and planning ahead of time. So obviously, we don’t know exactly what it’s going to look like yet, but us saying that we are obviously less UK focused, it’s purely the investment side.

David Cooke:

Yes.

Tom Merchant:

And obviously as you would imagine, all of our financial planners are intrinsically linked to what’s going on on that side. And I suppose from align with that as well, as always, please do drop your emails in and give your advisor a call. If you want to speak through any of this in further detail, obviously we’d be delighted to hear from you. But from my position, David, as always, thank you again for your time.

David Cooke:

Pleasure.

Tom Merchant:

We appreciate it. And yeah, if I may say so, depending where you’re listening to it, I just want to congratulate England on winning the World Cup or commiserations on Haaland scoring four goals against us on Saturday. But apart from that, want to wish you all a very happy summer, and yeah, look forward to speaking with you all in September.