Sam Heithersay
As we head into the second half of 2026, Fidelity International believes fundamentals are relatively supportive of risk assets, despite a highly volatile backdrop. The conflict in the Middle East has reaffirmed that investors are navigating a fragmented world. Markets are starting to look through the short-term noise towards resilient fundamentals supporting asset performance through the rest of the year, while the AI capex cycle remains a powerful upward driver for markets across the globe.
At the same time, traditional safe havens may not play the same role as they used to. And diversification is expected to prove more important than ever.
Top conviction for the rest of 2026:
- Equity risk: We are constructive overall, particularly in Japan and select emerging markets. We remain mindful of the strong rally markets have seen since April.
- AI capex: It has been the driving force for global markets and is supporting other themes like energy scarcity and grid upgrades.
- Commodities: Boosted by geopolitical fragmentation and the AI capex cycle, commodities that are energy-linked may provide useful diversification for geopolitical risk when traditional assets such as duration and gold behave less reliably.
Navigating the second half of 2026
“Markets have proven impressively resilient against a volatile first six months of this year. But their steadfastness shouldn’t be surprising. They’ve become well-versed in seeing through the noise and recognising upside,” said Salman Ahmed, global head of macro and strategic asset allocation, Fidelity International. “Now is not a time to shy away from risk, only to ensure it’s balanced in a well-diversified portfolio that will cushion the inevitable shocks when they come. While recent diplomatic progress between the US and Iran may help ease some immediate concerns, uncertainty remains elevated and the path ahead is unlikely to be straightforward.
“The key macro variable for the near future is the energy supply shock caused by the closure of the Strait of Hormuz. Our base case has been a ‘messy resolution’ to the conflict. The proposed deal to reopen the Strait of Hormuz and extend the ceasefire, points towards de-escalation, however, there remains a meaningful range of possible outcomes. Markets are likely to continue pricing some geopolitical risk premium until a durable resolution becomes clearer. Higher inflation and tighter monetary policy will drag on growth across most regions; energy markets will maintain a persistent geopolitical risk premium.”
A constructive environment
Resilient fundamentals are supporting markets, despite geopolitically-induced volatility. Most significantly, US tech behemoths are continuing to pour billions into AI development that is driving continued earnings momentum. That immense capex spend is bolstering companies across the value chain, including the industrial enablers that support the building of data centres and rising energy needs. A wider set of US businesses are also starting to feel the impact of that AI-driven capex spend underpin earnings and improve productivity. This broadening effect across the market presents enticing entry points while attention is focused on a small number of high-valued tech names.
Matthew Quaife, global head of multi asset, at Fidelity International, comments: “The earnings story remains strong globally, driven in part by the AI capex story, but also due to resilient economies and the partial unwinding of trade tariffs. The AI trade and strong earnings are supporting US stocks, though parts of that market have already run a long way. Emerging markets (EM) remain a high conviction allocation. EM equities benefit from broader tailwinds like the AI cycle. A softer dollar and structurally improving policy credibility should also be positive drivers. However, the conflict in Iran is having a divergent impact across different parts of the EM universe. Those exporters of commodities in Latin America are benefitting; those that import energy, particularly Asian economies that are reliant on supply that passes through the Strait of Hormuz, are suffering.
“Other structural themes will persist elsewhere, with Europe still investing in its defence sector, for instance, as conflict continues and policymakers strive to localise defence supply chains. Similarly, there is renewed focus on improving energy resilience, resulting in further investment by the US and Europe in their ageing grids.”
Rethink safe havens
As the macro environment changes, there is a need to rethink diversification. Heightened geopolitical and fragmentation risks are putting a strain on traditional safe havens, which means investors can’t rely on a single asset to support riskier elements of their portfolio. The dollar, for instance, does not look as attractive for the long term as it once did, owing to less consistent US policymaking. Exposure to commodities should support portfolios, with inflation set to remain higher for longer, particularly those with energy exposure that can protect against geopolitical risk.
A changing playbook for Australian equities
Australian equities are navigating an increasingly complex macro backdrop. Inflation remains above the RBA’s target range, geopolitical tensions are disrupting supply chains and energy markets, and the path for interest rates is proving more uncertain than expected at the start of the year. While the domestic economy has held up relatively well, higher funding costs and weakening consumer momentum are creating a more uneven earnings environment.
At the same time, the foundations remain supportive. Employment is still robust, population growth continues to underpin activity, and Australia is well positioned as a strategic supplier of resources and energy in a more fragmented global economy.
Sam Heithersay, portfolio manager, comments: “An important shift is taking place cantered on market leadership. For much of the past decade, Australian equity returns have been dominated by banks and domestic yield exposures, supported by falling interest rates, stable regulation and a concentrated market structure. While banks still benefit from resilient asset quality and strong capital positions, the conditions that drove sustained outperformance are becoming less powerful.
“We believe the market is now entering a period where leadership is likely to broaden. Higher rates and slower credit growth are beginning to constrain parts of the domestic economy that benefited most from abundant liquidity. At the same time, elevated bank valuations leave less room for disappointment. This raises a critical question for investors: does leadership shift away from domestic financials towards areas more exposed to structural global themes?”
Structural drivers are gaining momentum
Sam Heithersay comments: “There are increasing signs that this transition may already be underway. A higher-for-longer rate environment makes it more difficult for expensive defensives and long-duration income exposures to sustain the valuation premiums seen in the post-GFC period. In contrast, areas leveraged to structural shifts including deglobalisation, supply-chain security, energy transition and AI-driven change — are becoming more influential drivers of returns.
“Energy is one clear expression of this shift. Higher prices continue to pressure consumers, reinforcing a preference for more defensive exposures over discretionary spending. However, at a national level, Australia remains a reliable supplier of LNG, coal and uranium into a world increasingly focused on supply security. This is supporting national income and parts of the earnings base despite softer domestic conditions.
“Importantly, a genuine shift in market leadership is unlikely to be defined by a short-term rotation into commodities alone. A more durable transition would require evidence that markets are increasingly rewarding structural earnings growth, supply scarcity and global positioning over domestic leverage and housing exposure.
“Rather than viewing sectors in isolation, the focus is increasingly on identifying businesses exposed to structural tailwinds that can persist across multiple economic cycles. As a result, Australian equities may become less driven by traditional domestic exposures and more influenced by global themes such as scarcity, technological change and economic realignment.”
AI continues to drive growth while reshaping valuations
James Abela, portfolio manager, comments: “Artificial intelligence (AI) and rising commodity prices are dominating the drivers of earnings and multiples in the Australian small- and mid-cap universe. AI’s impact is broadening, extending into business consulting, engineering, finance, business software, legal and healthcare industries. We expect productivity benefits to flow over time. The durability of existing software or service moats, franchise strength and the ability to stay ahead of AI-driven product innovation are becoming increasingly important considerations that we expect to come into sharper focus over the next few years.
“Capital investment into AI in 2026 is currently running towards US$1 trillion, up from US$260 billion in 2024. This not only highlights AI’s rapid growth but also its scale in the global technology landscape. Competition for leadership is driving significant flow-on effects across data centres, associated engineering services, cooling systems, semiconductors and memory storage, as well as related commodities such as copper.
“For Australia, the positive flow-on benefits of AI have primarily been seen in the resources sector. Beyond the AI build-out, commodity prices have risen and remained higher for longer in 2026, supported by resource scarcity, a growing preference for physical over financial assets, and the appeal of HALO (heavy assets, low obsolescence) businesses. These assets are viewed as defensive, with low beta characteristics and rising replacement costs that continue to underpin strong valuation support.”
Volatility expected to remain
James Abela comments: “Factor leadership has shifted towards value and momentum, while quality has underperformed as duration concerns have weighed on companies traditionally viewed as having more predictable and resilient earnings profiles.
“There is still double-digit earnings per share (EPS) growth expected over the next 12 months, and index-level valuations are not elevated at around 16 times forward earnings. However, much of this growth is being driven by resources and energy, with limited breadth across other sectors remaining a key concern. With consumer and business investment sentiment still subdued, caution is likely to persist. Positively, the Australian market continues to expand, which we believe will support index performance over time.”
