Quarterly commentary - Q3 2026

Market commentary

The third quarter proved to be a challenging period for global markets, dominated by the re-escalation of the US-Iran conflict and its inflationary consequences. Brent crude oil surged by over 40% during the quarter, closing at over $100 per barrel, as both sides resumed strikes following President Trump’s declaration that the US-Iran memorandum of understanding was “over”. There was a brief respite in early August, when Brent fell below $80 after Trump signalled a potential deal, although this ultimately proved to be short-lived as hostilities resumed and Saudi energy infrastructure came under Houthi attack in September.

The inflationary impulse extended beyond energy, with agricultural commodities posting their largest quarterly jump since 2022 and thus contributing to a globally synchronised shift in central bank policy. The Federal Reserve delivered its first interest rate hike since 2023 in September, whilst the ECB also raised rates, stating that “inflation is set to remain well above target for an extended period”. Meanwhile, the Bank of Japan raised its policy rate to 1.25%, its highest since 1995. Against this backdrop, sovereign bonds sold off sharply, with the 10-year US Treasury yield rising by over 80bps to a post-2007 high of 5.3% and the 10-year Gilt yield rising by almost 70bps to 5.4%. Meanwhile, the German-French 10-year spread widened to 127bps, its widest since 2012 and potentially a sign of stress within the Eurozone.

In the UK, the FTSE All-Share returned +2.4% in total return terms over the quarter, with the domestically oriented FTSE 250 (+7.4%) significantly outperforming the large-cap FTSE 100. The UK CPI inflation index stood at +3.1% year-on-year as of August 2026, with the Bank of England’s policy rate unchanged at 3.75%. Within the UK stock market, Energy and Communication Services led sector returns, while Health Care lagged. In the US, despite the inflationary headwinds, resilient global growth and robust corporate earnings enabled the S&P 500 to post a +2.3% total return for the quarter. In the year to date, the FTSE 100 has delivered a total return of around 10% and the S&P 500 around 13%.

Attribution commentary

The trust performed well in the 3 months, outperforming the FTSE All-Share Index. The outperformance was driven primarily by strong stock selection and an overweight position within Communication Services, Information Technology and Financials. The trust’s underweight position in Industrials detracted from relative return.

Single-stock contributors

The five largest contributors to the trust’s return in the period were WPP, Shell, Johnson Matthey, BP and HP Inc. WPP was the standout performer, with its shares rising almost 60% over the quarter. In August, the advertising group’s shares surged by almost 30% in a single day after the company’s first half results showed a smaller-than-expected decline in organic sales and operating profits beat expectations. Most importantly, the new CEO’s turnaround plan seems to be gaining momentum, and the company has so far shown that its business model is not being disrupted by AI. Even post the recent share price rise, the company’s shares are priced at around 7x this year’s earnings and less than 5x our view of the company’s medium- to long-term earnings potential.

Shell rose by over 20% in the three months, with performance driven primarily by the surge in Brent crude over the quarter. However, the company also sold its European onshore renewables portfolio to TotalEnergies in line with its strategy of refocusing on core oil and gas and took a final investment decision to double LNG Canada capacity, signalling confidence in long-term production growth. The shares are currently valued on a cash price earnings ratio of around 11x making the conservative assumption that oil prices revert to $70 per barrel.

Similarly, BP gained almost 20%. Following a period of significant management upheaval, which culminated in the dismissal of the chairman, the company reported strong interim results. These were not only aided by rising energy prices but also by some of the steps that the new CEO is taking to improve the performance of the company. These include a more disciplined approach to capital allocation, cost cuts and disposals to improve the balance sheet. Again, BP is priced at around 11x earnings on the assumption that oil prices fall back to $70 per barrel.

Johnson Matthey also performed well. In August, it completed the £1.3 billion sale of its Catalyst Technologies business to Honeywell and confirmed a £1 billion shareholder return comprising an £800 million special dividend and a £200 million on-market buyback programme which was launched in September. The company is a market leader in the production of auto catalysts and precious metal refining; both areas where its operating performance should improve in the next two years. The company is valued on a multiple of 10x our view of its earnings potential.

PC and printing company HP Inc rose by over 40% in the three months. At its third quarter results the company raised its full-year profit guidance even though it expects PC volumes to decline in 2027. The shares are valued at 10x this year’s earnings.

Single-stock detractors

ITV and Centrica were the largest detractors from performance during the period. ITV fell a little over 15% despite agreeing to sell its Media & Entertainment arm to Sky for up to £1.6 billion in July. If the deal is approved by regulators, the company will use £950m of the sale proceeds to pay a large special dividend to shareholders. ITV will be left with solely its Studios business, the second largest independent TV production company in the world, which has delivered attractive growth over time. Once the special dividend is deducted from the share price, this Studios business is being valued at less than 9x earnings. Whilst the advertising market continues to be difficult and this has led to profit downgrades in the soon-to-be-disposed Media & Entertainment arm, we believe that the rump of ITV is being materially undervalued by the stock market.

Centrica fell by more than 10%. One would have expected Centrica’s trading arm to have benefitted from the recent rise in energy prices; however, the company was instead wrong-footed and announced a profit decline at its half year results. Understandably, this has caused investors to question the quality of the company’s trading unit and led to a de-rating of the shares. The company now trades on 9x our view of normalised earnings and has significant net cash on its balance sheet.

Portfolio activity

During the third quarter, the trust initiated new positions in IT services companies Accenture and Capgemini, and housebuilder Bellway.

The share prices of Accenture and Capgemini have fallen sharply in recent months around fears that AI is about to disrupt their business models. So far, neither has felt the adverse impact of developments in AI on its business, and each continues to report healthy sales growth and backlogs of new business. Both Accenture and Capgemini expect to continue to achieve mid-single-digit sales growth and strong margins.

Housebuilders have endured a brutally difficult few years and this has been reflected in poor share price performance. The period prior to Covid was characterised by rising house prices and subdued input costs (materials and labour) with the result that housebuilders saw their profit margins expand to what became unsustainably high levels. The last three or so years have been the mirror image of this, as interest rates have risen in response to the inflationary pressures that have built up in the system. Higher interest rates have made houses less affordable to mortgage borrowers, depressing house prices, whilst material and labour costs have inflated meaningfully. The result has been a margin squeeze and a sharp reduction in industry return on capital to levels today which are not sufficient to incentivise further investment in new development. It is likely that as a consequence, capital will be withdrawn from the industry allowing returns to improve over time.

Share prices have responded to the recent malaise by falling sharply and many companies in the sector are now valued at a meaningful discount to net asset value. Bellway’s share price has halved from its post-Covid peak, and the company is now valued at around two thirds of its tangible net asset value. The company has little debt and is valued at 7x our view of its medium-term earnings potential.

These purchases were partially funded by the sale of the trust’s position in Dutch insurer NN Group, and Korean financials Hana Financial Group and Woori Financial Group.

Outlook

Stock markets have delivered good returns so far in 2026, despite the oil price volatility caused by the US war with Iran and a significant rise in bond yields. Rising bond yields increase the so-called risk-free return that is available to investors and thereby all else being equal can be expected to reduce the relative attractiveness of equities. However, all else is not equal and this year has been marked by a surge in corporate profits growth. In the US, the aggregate profits of the S&P 500 Index of companies are currently tracking at more than a third higher than they were a year ago; a rate of growth normally only seen when the economy comes out of recession.

Given that by definition the deficit of one sector of the economy is the surplus of another, this turbocharged profit growth is likely being driven by large government spending deficits and the trillion-dollar annual spend that the large technology companies are making in AI. It is not unreasonable to expect therefore that anything that undermines either could cause a marked slowdown in profit growth or even a contraction. A slowdown in government spending could come as the result of higher interest rates as unruly bond markets compel governments to get their fiscal houses in order. A slowdown in AI development spend would most likely result from any realisation that the huge investments already made are not delivering the hoped-for investment returns. A combination of both could derail the US and possibly even the global economy. This is not a prediction but a recognition of the risks that investors face today. Accordingly, we are trying to remain vigilant to those companies that are potentially over earning and where profitability is at unsustainably high levels.

You can never escape share price volatility; it is part and parcel of being an equity investor and is why equity investors are paid an equity risk premium over time, but through sensible countercyclical portfolio construction, we can try and remove at least a portion of that volatility. This explains why much of the activity on the portfolio over the last twelve months or so has been to sell down the trust’s holdings in Financials and Materials (where share price performance has been strong), whilst adding to lowly valued but more stable areas of the market such as Consumer Staples, Pharmaceuticals and Medical Devices (where share price performance has been notably weak). The trust’s holdings continue to be modestly priced and we expect to deliver excess returns over time, but it is also fair to say that the risks to stock markets generally have increased.

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Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. Forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so.

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