Executive Summary 

  • Markets became more cautious in September as the prolonged Iran conflict pushed oil prices higher and revived concerns about inflation and interest rates.
  • The Bank of England held Bank Rate at 3.75%, while the Federal Reserve unexpectedly raised U.S. rates to 3.75%–4.0%, signalling that the period of falling interest rates may be coming to an end.
  • Global equities remained relatively resilient despite rising bond yields, although the U.S. market continued to look expensive and increasingly vulnerable to higher borrowing costs.
  • UK equities remain attractive on valuation, but rising inflation and gilt yields have reduced expectations for further UK rate cuts in the near term.
  • Diversification remains important: fixed income is becoming more attractive after the sharp rise in yields, while gold and other alternatives continue to provide useful diversification despite gold’s September decline.

Iran: The Energy Shock Continues 

The Iran conflict remained one of the most important influences on financial markets throughout September. 

While there were repeated reports of diplomatic efforts and possible progress towards a settlement, the underlying situation remained unresolved. At the end of September, Iran had received a U.S. response to a proposed seven-day trust-building plan involving the reopening of the Strait of Hormuz, but significant differences remained. 

This is important for investors because the Strait of Hormuz remains one of the world’s most strategically important energy routes. The conflict has therefore created an unusual situation where the financial markets are reacting not only to the actual supply of oil, but also to the cost and reliability of transporting it. 

By the end of September, Brent crude had risen around 14% during the month, finishing close to $103 a barrel. Oil prices were being driven higher by stalled U.S.-Iran negotiations and tightening fuel markets. 

Interestingly, subsequent shipping data showed that Middle Eastern crude exports had actually exceeded pre-war levels on several days during the final week of September. This illustrates the key issue facing markets: the problem is increasingly about logistics, shipping risk, insurance and refining capacity rather than simply whether sufficient oil exists. 

For investors, this creates a difficult combination. Higher energy prices increase inflation while simultaneously reducing consumers’ disposable income and increasing business costs. If sustained, this can weaken economic growth at exactly the same time as central banks are being forced to keep interest rates higher. 

Global Equities Context 

Global equity markets were surprisingly resilient during September despite the worsening bond and energy backdrop. 

The MSCI global equity index fell by more than 1% during the month, while the S&P 500 declined around 0.7%. The Nasdaq, however, gained approximately 1.7%, demonstrating that investors remained willing to support the large technology companies despite rising interest rates. 

The resilience of equities is perhaps the most interesting feature of the current market. Global shares remain more than 12% higher for the year, despite oil prices being around 70% higher year-on-year and major government bond markets experiencing significant losses. 

However, September reinforced one of our long-standing concerns: the valuation of U.S. equities leaves less room for disappointment. 

Higher bond yields increase the rate at which future company earnings are discounted. This is particularly important for technology and growth companies whose valuations depend heavily on profits expected many years into the future. 

The continued enthusiasm surrounding artificial intelligence has helped support the U.S. market, but investors are increasingly asking whether the enormous investment required to build AI infrastructure will ultimately produce sufficient returns. 

Our view remains that investors should not abandon the U.S., but the case for concentrating portfolios heavily in U.S. mega-cap technology companies is becoming less compelling. Attractive opportunities can be found elsewhere. 

Central Banks: Higher for Longer? 

September produced a significant change in the interest-rate narrative. 

In the UK, the Bank of England voted by six to three to maintain Bank Rate at 3.75%. More importantly, three members wanted to increase rates to 4.0%. The Bank highlighted the continuing impact of higher energy prices and warned that inflation is likely to rise further over coming quarters. 

UK CPI inflation had already increased to 3.1% in August, up from 2.9% in July, with motor fuels making the largest upward contribution to the monthly increase. 

This is a very different environment from the one investors expected earlier in the year, when the main question was how quickly interest rates could fall. 

In the United States, the Federal Reserve went further and raised its federal funds target range by 0.25% to 3.75%–4.0%, the first U.S. rate increase since 2023. The Fed cited elevated inflation, resilient domestic spending, strong productivity and robust capital investment. 

This reinforces the possibility that interest rates may remain higher for longer than previously expected. 

For investors, this is not necessarily negative. Higher yields mean that government bonds and high-quality fixed interest investments are becoming more attractive again. The key issue is the duration of the investment: investors need to balance the attraction of today’s yields against the risk that rates rise further. 

UK: Better Growth, But Inflation Remains the Problem 

The UK economy delivered a better performance than previously thought. 

The latest ONS estimate showed GDP grew by 0.5% in the second quarter of 2026, revised up from the previous estimate of 0.4%. This followed growth of 0.6% in the first quarter. Real household disposable income per head also increased by 1.0% in the second quarter. 

However, the labour market remains soft. 

The ONS reported that payrolled employees fell by 101,000 over the year to July, while the provisional estimate for August showed a further annual decline of 145,000. The unemployment rate was 4.9% for May to July. 

This creates a difficult balancing act for the Bank of England. The economy needs lower borrowing costs to support growth, but higher energy prices are pushing inflation in the opposite direction. 

The political backdrop also remains important. 

Prime Minister Andy Burnham used September’s Labour Party conference to argue that Britain should reconsider its long-term relationship with the European Union, including the possibility of eventually rejoining. He also indicated that the government intends to pursue a longer-term economic plan rather than immediate changes to Britain’s relationship with Europe. 

For financial markets, the immediate priority is likely to be fiscal credibility. 

Finance Minister John Healey has made clear that fiscal discipline will be central to the 28 October Budget, with the government conscious of the cost of servicing Britain’s high level of debt. 

The combination of inflation, high gilt yields and a large government debt burden means the Budget will be particularly important for sterling and UK government bonds. 

Other Viewpoints 

Cash 

Cash remains attractive because interest rates are still relatively high. However, the September change in expectations means investors should no longer assume that rates will simply continue falling. 

Cash provides certainty and liquidity, but the opportunity cost of remaining in cash increases if bond yields rise and equity markets recover. 

For investors with longer-term objectives, we continue to favour using cash strategically rather than allowing large balances to remain uninvested indefinitely. 

Fixed Interests 

September was an extremely difficult month for bond investors. 

The U.S. 10-year Treasury yield rose by around 53 basis points during the month, its largest monthly increase since September 2022. UK and European government bond yields also moved significantly higher. 

The result has been painful for existing bondholders, but it is beginning to create a more attractive entry point for new investment. 

Higher yields mean investors can now obtain a more attractive level of income, while any eventual return towards lower interest rates would provide the potential for capital gains. 

The key question is therefore whether today’s higher yields represent an opportunity rather than the beginning of a further sustained rise in rates. 

Alternatives 

Gold fell sharply during September, declining by approximately 6.6% as rising bond yields and a stronger dollar reduced its appeal. 

Despite the monthly fall, we continue to view gold as an important portfolio diversifier rather than simply a short-term investment. 

The lesson from September is that even assets regarded as defensive can fall when interest-rate expectations change dramatically. 

Other real assets and commodities remain useful diversifiers, particularly while geopolitical tensions continue to create uncertainty around energy prices. 

UK Shares 

The FTSE 100 finished September at around 10,606, recording its biggest monthly decline since March. 

Higher oil prices, inflation concerns and rising bond yields weighed on sentiment. Nevertheless, the index achieved its seventh consecutive quarterly gain. 

Our long-term view remains positive. 

UK companies continue to generate a large proportion of their revenues internationally, meaning the FTSE 100 is not simply a reflection of the UK economy. 

Valuations also remain considerably more attractive than those of many U.S. companies, and the market provides exposure to financials, energy, healthcare and consumer businesses that can benefit from a broader global economic recovery. 

US Shares 

The U.S. market remains the most difficult area of the developed equity markets to assess. 

The Nasdaq gained around 1.7% in September, while the S&P 500 fell approximately 0.7% and the Dow fell around 4.9%. 

The continued strength of technology stocks demonstrates the market’s confidence in the AI investment cycle. However, rising bond yields present a significant challenge to highly valued growth companies. 

The U.S. market remains an important part of any globally diversified portfolio, but we believe investors should be increasingly selective. 

The combination of valuation, concentration and dependence on continued AI investment means the case for being heavily overweight the U.S. is no longer as compelling as it was. 

European Shares 

European markets were weaker in September as higher energy prices and rising bond yields increased concerns about inflation. 

However, valuations remain considerably more reasonable than in the U.S. 

Europe also stands to benefit if the global investment cycle broadens beyond the U.S. technology sector. The potential for closer UK-EU economic relations under the Burnham government could provide an additional long-term consideration, although any economic benefits would take years to materialise. 

Asian Shares 

Asia remains an important part of our long-term investment view. 

Japan continues to benefit from corporate governance reform and an improving focus on shareholder returns. 

India retains one of the strongest long-term structural growth stories among major economies, supported by demographics, infrastructure investment and rising domestic consumption. 

China remains more complicated because of its property market and structural economic challenges, but its continued investment in technology, manufacturing and productivity means it should not be ignored. 

Emerging Markets 

Emerging markets remain sensitive to movements in the U.S. dollar, commodity prices and global interest rates. 

The higher dollar and rising global bond yields created a more difficult environment during September, but many emerging economies have stronger domestic economic foundations than they did in previous cycles. 

A more diversified global portfolio can therefore benefit from the long-term growth potential of emerging markets without relying on any single country. 

House View Bias Scale 

September reinforces our preference for diversification and relative value rather than simply following recent market performance. 

UK Shares — Overweight
Attractive valuations, strong international earnings exposure and a broad sector mix. 

European Shares — Overweight
Valuations remain attractive relative to the U.S., with scope for economic and earnings improvement. 

Asian Shares — Overweight
Strong long-term structural growth, particularly in India and Japan, with selective opportunities in China. 

Emerging Markets — Neutral to Overweight
Attractive long-term growth potential, but more sensitive to the dollar and global liquidity. 

US Shares — Neutral
High-quality companies remain attractive, but valuations and concentration make the risk/reward less compelling. 

Fixed Interest — Increasingly Attractive
Higher yields provide better income opportunities and potential capital gains if interest rates eventually fall. 

Cash — Neutral
Still attractive for liquidity and short-term certainty, but reinvestment risk is increasing. 

Gold & Alternatives — Neutral
Useful portfolio diversifiers, although gold’s valuation and recent volatility warrant caution. 

 

Highlights & Risks 

Highlights: 

  • UK GDP growth was revised higher, with the economy expanding by 0.5% in Q2.
  • Higher bond yields are creating increasingly attractive opportunities for investors seeking income from fixed interest.
  • UK, European and Asian equities continue to offer better relative value than expensive areas of the U.S. market.
  • Global equities remain remarkably resilient despite geopolitical tensions, higher oil prices and a sharp rise in government bond yields.

Risks: 

  • The Iran conflict continues to create a significant risk of higher and more persistent energy prices.
  • Inflation is moving higher again, limiting the ability of central banks to cut interest rates.
  • U.S. equity valuations and concentration remain elevated, particularly around AI-related companies.
  • Rising government debt and bond yields could become a more significant constraint on both fiscal and monetary policy.

Conclusion 

September has changed the investment landscape. 

At the start of the year, the dominant expectation was that inflation would continue to fall and interest rates would gradually decline. The energy shock created by the Iran conflict has challenged that assumption. 

The Bank of England is now warning that inflation could rise further, while the Federal Reserve has already increased interest rates. At the same time, government bond yields have risen sharply. 

Yet the important point is that markets have not collapsed. Global equities have remained remarkably resilient, demonstrating the importance of diversification and the underlying strength of corporate earnings. 

Our view therefore remains one of cautious optimism. 

We do not believe investors should attempt to predict the next geopolitical development or make large portfolio changes based on individual headlines. Instead, the focus should remain on valuation, diversification, quality and the long-term investment objective. 

There are opportunities in markets that have fallen as well as those that have risen. In our view, September has strengthened the case for looking beyond the most expensive parts of the U.S. market and towards areas where valuations, income and long-term growth prospects provide a more attractive balance.