Date:

Marketing Communication | Quarterly Commentary

Market Update

Global markets delivered strong gains during the quarter, supported by easing geopolitical tensions, resilient corporate earnings, and continued enthusiasm for artificial intelligence (AI)-related investments. Equity markets rebounded sharply in April and extended their gains in May as indirect dialogue between the US and Iran reduced concerns over the economic impact of the Persian Gulf conflict.

Investor sentiment was further supported by strong first-quarter earnings results and upward revisions to 2026 and 2027 profit forecasts, particularly within the technology sector. The MSCI All Country World Index rose strongly over April and May, led by the US and emerging Asian markets, before giving back some gains in June as investors took profits in technology stocks following an extended rally.

Monetary policy remained a key market driver. The appointment of Kevin Warsh as Chairman of the Federal Reserve initially boosted market confidence, although his first policy meeting in June was viewed as more hawkish than expected. This contributed to higher US rate expectations and supported the US dollar. In Europe, economic weakness and differing inflation dynamics led to a more mixed bond market environment, with European yields generally lower earlier in the quarter before the European Central Bank raised interest rates in June.

Commodity markets reflected the changing geopolitical backdrop. Oil and industrial metals rose in April due to disruption risks surrounding the Strait of Hormuz but later retreated as tensions eased and negotiations between the US and Iran progressed. By quarter-end, energy prices had largely returned to pre-conflict levels, helping to moderate inflation expectations. Despite some consolidation in June and growing scrutiny of elevated technology valuations following the successful SpaceX IPO, the combination of strong earnings growth, improving geopolitical conditions and confidence in AI-driven productivity gains continued to support a constructive outlook for risk assets.

Fund Performance & Positioning

In the second quarter of 2026 the Fund delivered an absolute return of 1.30% (compared to the reference index at 1.38%). Consistent with our cautious approach, the Fund had no exposure to subordinated debt which was negatively impacted by the risk off mode (3% corp hybrids, 2.44% bank LT2, 4.02% bank AT1). Subordinated debt represents around 10% of the reference Index and in Q2 2026 contributed +16bps of total performance.

At quarter end, the Fund was exposed to 17 countries, compared to the 46 countries of the reference index. Our largest overweights are US (+8.4%), Britain (+5%), and Denmark (+4.6%), while the biggest underweights were Netherlands (-10.8%) and France (-9.7%). We have no exposure to China or other minor countries represented in the benchmark, such as United Arab Emirates, Croatia, Czech, and Hong Kong, etc.. In terms of duration, the Fund maintained a neutral stance throughout the period (at the end of Q2 2026 the modified duration stayed at 1.8 years vs 1.95 years for the reference market) underweighting the 1-3y bucket (-0.11y) compensated by overweighting 0-1y (+0.02y) and 3-5y (+0.18y) buckets. Duration was stable during Q2 2026. From a sector point of view, the quarter ended with an overweight to a long lasting and well-diversified group of senior financials (55% vs 49%). We ended Q2 2026 slightly underweight Industrial (-5%), Consumer, Cyclical and Basic materials (-2% each).

Looking at ratings, we kept an overweight in the AA (+16.3%) and A (+8.4%) buckets, and a long-lasting underweight to the BBB bucket (-24.2%). In terms of activity, we participated in the primary market (or switched positions) to enhance diversification, decrease risk, increase yield and/or improved our ESG score. In terms of duration buckets, we shifted exposure from the 0-1y to the 1-3y. We enter Q3 2026 with a better relative A average rating (A- for the reference Index), 3.12% yield and 1.9 years.

We are still not considering aggressive and volatile positioning such as high yields and/or subordinated bonds: good opportunities are provided by the Investment Grade universe while focusing in delivering a cautious approach. Better risk adjust returns is the clear outcome for the client who invests in our short-term investment grade product. The Fund has always had only Euro denominated issuers, so no Forex exposure. No derivatives have been used. In addition, we remember the Fund is an Article 8+. Green bonds at the end of Q2 2026 stay at 24% vs 15% of the reference index.

Outlook

The US-Iran war dominated the macro and market narrative throughout the second quarter of 2026, acting as the primary driver of volatility across European credit markets. The Strait of Hormuz remained partially or fully blocked for much of the period, triggering record-pace drawdowns in global oil inventories and pushing Brent crude to nearly $120/barrel in the early weeks of Q2 2026. Ceasefire talks stalled repeatedly, most notably in early June 2026 when Hezbollah rejected a US-brokered truce, before a preliminary peace accord was reached in mid-June 2026, offering Iran broad financial incentives including the immediate right to sell oil. Oil prices retreated sharply on the news. Despite the ceasefire, the UK government reportedly revised its internal oil price forecasts to around $100/barrel through 2028, reflecting expectations that energy flows from the Gulf will take longer to normalise than initially assumed.

The European Central bank (ECB) navigated a difficult quarter, ultimately pivoting to tightening for the first time in almost three years. At its April 2026 meeting, the Governing Council held the deposit rate unchanged at 2.00%, with President Lagarde signalling the decision had been debated intensely and that a June 2026 hike was firmly on the table. By early May 2026, a growing chorus of Governing Council members (including Kazimir, Nagel, and Schnabel) made it clear that tightening in June 2026 was "all but inevitable" absent a marked improvement in the energy outlook. On 11 June 2026, the ECB raised the deposit rate by 25bps to 2.25%, with Lagarde warning that inflation triggered by the Iran war was widening beyond energy alone into broader price pressures. Bundesbank President Nagel immediately signalled readiness to hike again in July 2026 if necessary. By the end of Q2 2026, however, the tone had softened somewhat: speaking at the ECB's annual Sintra forum, several officials (including Lane and Dolenc) stopped short of pre-committing to a July 2026 move, noting that a pause could be warranted if energy markets remained calm and second-round effects did not materialise. Markets currently price a further 25bp hike in September 2026, which would bring the deposit rate to 2.50%.

The second quarter of 2026 confirmed a stagflationary dynamic across the euro area, explicitly acknowledged by ECB Governing Council member Rehn at Sintra. Key recent data points highlight three main themes. On the inflation side, euro-area Harmonised Index of Consumer Prices (HICP) rose to 3.2% year-on-year in May 2026, the highest reading since 2023, with core inflation also surprising to the upside at 2.5%. A late-quarter relief came from France, where consumer price index (CPI) fell back to 2.0% in June 2026 as energy costs retreated, marking the largest monthly decline in over a year. In terms of growth, the euro-area composite PMI dropped below 50 in April 2026 for the first time since late 2024, with services bearing the brunt of the energy shock. Germany’s composite PMI remained in contraction at 48.0 in June 2026, while French activity shrank for a sixth consecutive month. Germany’s Bundesbank revised its 2026 GDP forecast down to just +0.5%, with Q2 GDP now expected to stagnate. Finally, in the labour market, French unemployment rose to 8.1% in Q1 2026, the highest level since 2021, reinforcing signs of a weakening growth backdrop.

The Bloomberg Euro Corporate Index (ER00) oscillated significantly throughout the second quarter of 2026, reflecting the shifting geopolitical and monetary policy backdrop, ending +1.9% for Q2 2026. The 1-3y segment (ICE BofA 1–3 Year Euro Corporate Index, ER01) offered a more defensive profile through the quarter's volatility. In absolute total return terms, the short end underperformed the broad index and longer maturities delivering +1.20% for Q2 2026 versus +1.9% and +3.0% for the 10+ year segment (ER09) as it captured less of the late-quarter duration rally.

The short end benefited from its significantly lower duration-times-spread sensitivity, limiting price drawdown during the peak volatility of April 2026 and early June 2026. With the ECB now in hiking mode and the rate path uncertain, the 1-3y bucket continues to offer an attractive carry to duration trade-off, with the yield-to-worst of the broad index at 3.45% providing a meaningful buffer against further spread widening. Demand for short-dated paper remained robust in primary markets, with issuers including Danaher (2-year FRN) and NTT (2-year FRN, long 3-year) attracting strong order books. Supply was a defining feature of the second quarter of 2026. April 2026 was the third-busiest April on record for European syndicated debt, with volumes of approximately €145bn, as issuers rushed to lock in funding ahead of anticipated ECB tightening.

In terms of positioning, we start the third quarter of 2026 with an overweight in Financials representing 54.8% of the portfolio. Bank fundamentals remain strong, with cost of risk at low levels as Non-Performing Loans (NPL)s hover near historic lows. Also, capital positions and liquidity coverage ratios remain strong and comfortably above requirements. However, net interest margin compression and exposure of private credit of some US Financial remain a challenge. As a reference, we have never been invested in regional banks. Being selective remains always crucial.

In terms of strategy, we follow our approach that aims to maximise diversification through a strong and repeatable investment process which is strongly focused on risk. Our proprietary risk tool identifies a series of small idiosyncratic risks in the investment universe that we want to avoid, while we make sure we are better diversified on the main risk factors. As such, we continue to avoid subordinated bonds, high yield, regional banks, real estate sector, low liquidity issuers/bonds and countries such as China, Brazil, etc. Being aware these elements are an important missing factor which could provide good performance in a risk on environment, we remain sticky to be structurally not exposed on the above to be consistent with our investment process and provide a true consistent cautious approach. In addition, as we always reminded even in previous years, geopolitical risk will continue to be an important theme to be constantly carefully watched. In this context, we hope short term credit bond will be less affected by the expected volatility. Our process continuously scans the market, including the primary market, to enhance diversification and minimise risk. We combine quantitative and qualitative expertise, creating genuine synergy, with qualitative analysis ultimately guiding decisions to deliver the best risk adjust return for our client.

Disclaimer

MARKETING COMMUNICATION

This document has been produced by EFG Asset Management (Switzerland) SA is authorised and regulated by the Swiss Financial Market Authority. Registered address: EFG Asset Management (Switzerland) SA , Quai du Seujet 24, 1201 Geneva, Switzerland. Telephone +41 22 918 71 71. 

All sources: EFG Asset Management (UK) Limited ("EFGAM"), Factset, Bloomberg, Morningstar as at end of the month.  Any other sources as applicable.  

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For Professional, Institutional and Wholesale Investors Only. This document has been prepared and issued by EFG Asset Management (UK) Limited, a private limited company with registered number 07389736 and with its registered office address at Park House, Park Street, London W1K 6AP (telephone number +44 (0)20 7491 9111). EFG Asset Management (UK) Limited is regulated and authorized by the Financial Conduct Authority No. 536771.
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Offering Documents
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