From Froth to Fundamentals: The market’s shift toward quality and selectivity

Global markets remained volatile through July as concerns over AI capex returns, an unwind of leveraged positions and uncertainty around the Fed weighed on sentiment. Investors favoured large caps and defensives, while inflation remained sticky across energy, food, tariffs and housing. Despite the near-term noise, fundamentals remain supportive and the forced-selling phase appears to be easing. We remain constructive on risk assets while acknowledging scope for volatility.

1. Quality over concentration. Weak sentiment around AI capex returns and the unwinding of leveraged positions drove investors towards large caps and defensives. The S&P 500 fell just 0.1% in July versus 3.1% for the Russell 2000, while the healthcare valuations rose from 17.3x at the start of June to 18.5x by end-July. As valuations rise, investors are likely to favour quality and diversification over concentrated positions.

2. Margin unwind: most of the forced selling may be behind us. Leveraged positioning fell sharply across Asia, with margin balances down 25.5% in Korea, 15.5% in Taiwan and 13.1% in China from recent peaks. While balances remain elevated, the pace of de-risking lowers the risk of another forced-selling cascade and shifts the focus back towards fundamentals.

3. Inflation has multiple pressure points. Energy, food, tariffs and housing could keep inflation elevated. Energy remains vulnerable to further spikes, food inflation faces supply-side stress, while 10–12.5% tariffs and potentially higher levies could add to prices. Higher mortgage rates are also keeping shelter inflation sticky, limiting the scope for aggressive rate cuts.

4. USD strength is narrower than it appears. Dollar strength against developed-market currencies, particularly the EUR and JPY, has supported the DXY. Against EM currencies, however, the USD has depreciated during Jan–Jul 2026. While geopolitical stress could trigger intermittent strength, structural factors continue to point towards a weaker dollar over the medium to long term.

5. Selective REITs offer structural support. Higher rates remain a headwind for real estate, but select segments can benefit from structural demand. Healthcare REITs gain from an ageing population and residential REITs from persistent affordability pressures. The opportunity lies in selecting segments where structural demand can outweigh the rate headwind.

How this shapes a portfolio:

We retain a 70/20/10 allocation across global equities, commodities and select REITs. Equities are split 60% developed markets and 40% emerging markets, balancing resilience with structural growth. Within commodities, gold remains the anchor, supported by central-bank accumulation and de-dollarization, while silver, base metals and agriculture add cyclical exposure. REIT exposure remains focused on data centres, US residential and healthcare. We remain zero-weight duration, given sticky inflation, fiscal pressures and limited evidence of the conditions that typically support sustained bond bull markets.

The full reasoning, and every chart behind these themes, sits in the August edition of The Investing Pantheon, available to download below.

Read the August Pantheon: Here