Mid-year review 2026: a lesson in diversification

By Darius McDermott on 8 July 2026 in Equities, Best performing funds

The first six months of 2026 have served to remind investors that markets rarely move in straight lines. Geopolitical tensions, particularly in the Middle East, created periods of heightened volatility as investors grappled with the potential impact of higher oil prices on inflation and economic growth. Yet despite these uncertainties, global markets have continued to deliver positive returns.

Key takeaways:

• Despite geopolitical uncertainty, markets have remained remarkably resilient in the first half of 2026
• Artificial intelligence continues to dominate returns, but the winners are becoming much broader than just US technology companies
• UK equities continue to look attractively valued, with smaller companies offering compelling long-term opportunities
• Diversification remains one of the most important tools for investors

Our take on 2026 so far….

One of the biggest stories of the year has been the evolution of the artificial intelligence investment theme. While the initial excitement centred almost entirely on US technology giants, 2026 has seen the benefits spread much further across the AI ecosystem. Asian markets, particularly Taiwan and South Korea, have been major beneficiaries thanks to their critical role in supplying the semiconductors and memory chips powering AI infrastructure. Emerging markets have also performed strongly, as investors recognise that the AI supply chain extends beyond Silicon Valley.

This broadening of market leadership is healthy. Rather than relying on a handful of US technology stocks, investors are seeing opportunities emerge across different regions and sectors. It also reinforces an important investment lesson: diversification matters. Many investors may have gained exposure to this trend through regional or emerging market funds without even realising they were benefiting from the global AI ecosystem.

At the same time, the outlook remains closely tied to inflation. Oil prices have eased following the ceasefire in the Middle East, but whether that stability continues will play an important role in determining how central banks respond during the remainder of the year.

What’s to come for UK markets?

The UK continues to present an interesting picture. While it hasn’t benefitted from the AI boom to the same extent as the US or parts of Asia, it has quietly produced respectable returns thanks to its exposure to sectors such as financials, mining and defence.

Perhaps the biggest attraction remains valuation. Many fund managers we speak to continue to argue that UK equities, particularly smaller companies, trade well below their long-term intrinsic value. That has helped fuel ongoing merger and acquisition activity, with overseas buyers taking advantage of attractive valuations. While this has rewarded shareholders in the short term, it also highlights the concern that high-quality UK businesses remain undervalued.

The best and worst-performing sectors in 2026

Technology has once again dominated returns, although the story has broadened considerably. The Technology & Technology Innovation sector leads the way with returns of 29.6%, followed closely by Asia Pacific ex Japan (26.6%) and Global Emerging Markets (25.5%)*. Rather than being driven solely by US technology giants, much of this performance reflects the growing importance of Asian companies supplying the hardware and infrastructure needed to support AI development.

At the other end of the table, India has fallen 6.9%* after investors rotated towards AI-related opportunities elsewhere and higher oil prices weighed on the country’s outlook as a major energy importer. Targeted Absolute Return (2.5%) and China (2.6%)* also rank among the weaker performers, while many fixed income sectors have lagged as markets continue to adjust to an uncertain interest rate environment.

Best-performing Elite Rated funds

So far, the year’s strongest-performing Elite Rated funds reflect many of the themes already discussed. Growth-oriented technology strategies and funds investing across Asia and emerging markets dominate the leaderboard, benefiting from the continued expansion of the AI ecosystem beyond the United States.

Leading the rankings is WS Blue Whale Growth, returning 45.2% year to date, followed closely by Baillie Gifford Pacific (44.8%) and Allianz Technology Trust (42.7%)*. The wider top 15 is heavily populated by Asian and emerging market strategies, highlighting how investors have increasingly looked beyond the US for opportunities linked to technological innovation and stronger regional economic growth.

Looking ahead to the second half of 2026

If the first half of the year has taught investors anything, it’s that markets are capable of looking through short-term uncertainty. Geopolitical events, changing inflation expectations and shifting central bank policy will continue to generate headlines, but history shows that long-term investment success comes from remaining focused on fundamentals rather than reacting to every twist and turn.

Artificial intelligence is likely to remain one of the defining investment themes, although investors should be mindful that the opportunity now extends far beyond a small group of US technology companies. Companies involved in semiconductors, infrastructure, power generation and data centres across Asia and elsewhere are increasingly becoming important beneficiaries of the next phase of AI investment.

Closer to home, the UK continues to offer an interesting value opportunity, although much will depend on whether investor confidence returns to the UK market. Lower valuations provide a strong starting point, but greater political and economic certainty will likely be needed before international investors commit significant new capital. For long-term investors, however, today’s valuations could present an attractive opportunity.

Above all, the second half of 2026 is likely to reinforce a timeless lesson: diversification remains one of the most effective ways to navigate uncertain markets. Rather than trying to predict the next winning region or sector, maintaining a well-balanced portfolio across different asset classes and geographies continues to offer investors the best chance of achieving their long-term goals.

*Source: FE Analytics, total returns in pounds sterling, 1 January 2026 to 30 June 2026