Geopolitical tensions, shifting interest-rate expectations and continued enthusiasm for AI shares are among the themes that shaped markets in the first half of 2026. Sean Munsie discusses how these developments influenced the Allan Gray Stable Fund's positioning and performance over the period.
While 2025 delivered stellar market returns, the first half of the year has presented an altogether more difficult environment for investors, with the outbreak of war in the Middle East in February being the single biggest market-moving event. The escalation of the conflict and the resulting shipping disruptions in the Strait of Hormuz, through which roughly one-fifth of the global oil supply is transported, led to a sharp rise in crude oil prices. In turn, rising inflation expectations and lower economic growth estimates have heightened global market volatility.
Heading into the year, the consensus was that the interest rate-cutting cycle would continue, but the war has reversed this narrative and pushed the European Central Bank, the Bank of Japan and the South African Reserve Bank towards hikes. Developed market sovereign debt yields have broadly moved higher. In the United States, expectations that the incoming US Federal Reserve (Fed) chair, Kevin Warsh, would favour policy easing were also challenged, as the Fed’s recent statement took a more hawkish tone. Greater emphasis was placed on reining in rising prices as US inflation hit levels last seen in 2023, when the Fed was tightening monetary policy. Market expectations shifted dramatically towards two rate hikes by the end of the year.
The signing of a memorandum of understanding between the United States and Iran in June and subsequent attempts to restore normal transit through the Strait of Hormuz have contributed to a significant decline in oil prices, fully reversing the war-driven increases. However, tensions remain elevated, with uncertainty on how long the ceasefire will endure. Although each side is motivated by different incentives, it is becoming clearer that the bar for resuming hostilities has moved higher.
The artificial intelligence (AI) trade, powered by record levels of data centre capital expenditure, remains a dominant theme driving US equity markets to new all-time highs. Approximately half the weight of the S&P 500 is now attributed to AI-related shares, highlighting the binary nature of the US market into “AI winners” versus “AI losers”.
The MSCI World Index returned 9.7% in US dollars for the first half of 2026, while the FTSE/JSE All Share Index and the FTSE/JSE All Bond Index returned -3.0% and 4.2%, respectively, in rand terms. The Allan Gray Stable Fund’s year-to-date return of 4.9% should be viewed against this backdrop. Local equity selection added to the Fund’s return, with holdings in AB InBev and Sasol, together with underweight exposure to precious metal miners among the largest contributors to relative outperformance. Hedging instruments have also helped shield the Fund from broader equity market weakness. Within the Fund’s offshore exposure, the performance of the underlying Orbis funds also boosted returns.