These to me are the elephants in the room when I look at what’s going on in investment markets this year, and they are all quite interlinked.
Inflation
Inflation is on the rise again and it’s not just coming from the blockage in the Strait of Hormuz, although that is clearly a major factor. Browsing around today it seems around 100 ships have passed safely through the straits since the outbreak of war compared to traffic of more than100 ships a day pre-conflict.
Supply chains are dynamic, but it is increasingly going to hurt around the world, and ever more the longer it goes on.
- Fertiliser shortages could lead to famine in Africa and will push up the cost of food.
- Jet fuel shortages are giving airlines the excuse to push the cost of flights up – around 25% on average since the start of the year, with bigger rises on long-haul and premium classes.
- Petrol prices are rising. Even in the US, and despite it being self-sufficient
The Strait of Hormuz could be reopened with a settlement, but it seems this is going to need to come from negotiation with Iran rather than US military brute force. Is the current regime capable of negotiating such a deal after the rhetoric of the last few months, and how long will it take?
But this is not the only factor pushing up inflation. AI is also causing pockets of inflation, and this is not going to go into reverse any time soon. Demand for AI-related computing is inflating commodity prices and computing hardware costs. Those firms investing heavily on AI need to recoup their investment. Jensen Huang of Nvidia recently said he would be deeply alarmed if any engineer was not spending at least 50% of his salary on AI tokens!
Cost efficiencies may come in time, but the immediate impact of AI is pushing our tech costs up, not down, and pushing huge demand for some (often rare) metals and energy.
US inflation is approaching 4% a year and, except for in China, is likely to be higher around the world. BTW someone has already paid £10 for a pint of lager in a London pub!
Inflation is why we must invest and, depending on how you spend your money, is likely to be outstripping bank deposit rates by a good margin. Money on deposit is going down in value in terms of a lot of the things we might want to spend it on in the future.
Bond Yields
Yields are rising across most of the yield curve (from short- to long-duration bonds) and almost everywhere in the world. Japan, Europe, the US, and the UK all have bond yields 0.5-1.5% higher now than this time last year. Let’s not kid ourselves or have the media persuade us this is all down to a Labour party leadership contest – it is a global phenomenon.
The higher cost of money expressed in higher bond yields is impacting leveraged businesses around the world. Nowhere is this felt more acutely than in private equity and private credit. The mighty Blackstone is off 20% year to date and c40% from its peak value. The UK’s 3i hit £20 a share this week after a peak value of £45 in October last year. Much of private equity investing involves leveraging businesses to maximise returns; great when it works, usually terminal for co-shareholders when it doesn’t.
More than ever, businesses with strong balance sheets – whilst maybe not delivering the very biggest returns – will be much better placed to survive and protect value in what the future brings.
The Impact of AI
Total available computing capacity from AI chips across all major designers has grown by approximately 3.3x per year since 2022, enabling larger-scale model development and consumer adoption. NVIDIA AI chips currently account for over 60% of total compute, with Google and Amazon making up much of the remainder.
Epoch warns on the accuracy of this data which they glean from various sources, but it’s clearly still growing rapidly.
Chart 2. – Where data centres are going in terms of size and cost.
This is what is pushing inflation. The energy and resource costs in this buildout are ginormous. Microsoft has already committed $7bn to its planned Wisconsin centre and some estimates suggest total costs could reach $100bn. That’s about half the annual costs of the NHS in England on one data centre complex for one company.
Finally Chart 3. Epoch’s capability ratings of the various sources of AI. The takeout for me here is that improvements are levelling off and gains from here are going to be more costly than the early improvements achieved.
Semiconductors
So far, by far the biggest impact on investment markets has been in the chip business or semiconductor businesses at the heart of AI processing. iShares MSCI Global Semiconductor ETF touched an 80% gain year to date as the companies funding the AI spend look to secure their chip supplies for the coming years. Whilst the mighty Nvidia is up 26% so far this year, other businesses like Samsung (who supply memory chips) and Intel (on a massive turnaround and doing deals with Tesla) have more than doubled in value.
Some of these companies are now getting very big! Nvidia is heading towards $6 trillion, Taiwan Semiconductor (Nvidia’s main supplier of chips) is worth $2.1 trillion and Samsung Electronics $1.3 trillion. They are so big that they are dominating world indices, US indices, Emerging Market indices and Asian indices. For some context Taiwan Semiconductor’s value is about half that of the whole Indian stock market, which has been booming.
So not only have they been shooting up in value, but they also represent a massive chunk of returns in equities across the board this year. In the short term, with an expected $3 trillion infrastructure spend on AI infrastructure, the price hike is understandable. Samsung just reported a near 50% increase in operating profits from its memory chips. Short term price earnings ratios are not going up dramatically, but these capital-intensive businesses are being valued at or above their historic range relative to turnover and profits.
Owning Semiconductor firms is not without risk. They are notoriously ‘cyclical’ in nature, meaning they regularly go from boom to bust as supply and demand change. Right now demand is super strong, but you do not want to own them when the tide goes out!
Nick found me a Semiconductor index in the US with a long track record. It went from 1,200 to 200 after the dotcom crash. Any hint of the AI spend starting to slow (the rate of acceleration in the spend slowing, not the spend itself!) and there could be significant pain in these shares.
We have some exposure to Semiconductors – of course, never as much as you would like with the benefit of hindsight. Jupiter Asian Income, which has held both Taiwan Semiconductor and Samsung, is up c23% in 2026 so far. As a UCITS fund it can’t have more than 10% in any one stock, so it will have been forced to take profits in these stocks as they have grown in value – no bad thing.
Nick Gait reflects below on this risk and return concentration and what we are doing about it below.
The AI Rally and Maintaining Perspective in Narrow Markets
Despite ongoing geopolitical uncertainty, global equity markets continue to reach new all-time highs. Beneath the surface, however, market leadership has become increasingly narrow. Returns have been heavily concentrated in a small number of AI-related companies, particularly within the semiconductor sector, while performance across the broader market has been far more subdued. Concerns surrounding the potential second-order economic and geopolitical consequences of renewed tensions between the United States and Iran have continued to weigh on sentiment outside these leadership areas.
This represents a notable shift from the broader-based market strength experienced from the fourth quarter of 2025 through to the outbreak of the US-Iran conflict on 28 February. Since then, and particularly following the start of earnings season, market breadth has deteriorated materially, with an increasing share of returns driven by a relatively small group of companies and sectors. While there have been some notable exceptions, most prominently Taiwan Semiconductor Manufacturing Company and Samsung Electronics, the concentration of returns has been predominantly a US phenomenon.
The first table below shows the three-month performance attribution of the iShares MSCI ACWI ETF, which returned approximately 6.2% over the period. Of this, around 85% of total performance, 5.32%, shown in the top left of the table, came from US-listed companies, with approximately 84% of returns attributable to the top ten contributors alone (two Alphabet share classes).
Source: Morningstar 12/05/2026
The right-hand side of the table presents a markedly different picture. Europe, Japan and traditional emerging markets collectively generated negative returns over the same three-month period, highlighting the increasingly uneven nature of global equity performance.
The second table illustrates the same concentration from a sector perspective. Approximately 65% of returns came from semiconductors, with a further 30% generated by technology hardware. By contrast, sectors that have performed strongly for us over recent years, including banks and defence, were among the largest detractors from index performance during the period.
Source: Morningstar 12/05/2026
Periods such as these can be particularly challenging for diversified portfolios. Strategies constructed to perform across a range of market environments will naturally lag highly concentrated ones during narrow rallies driven by a small number of dominant companies and sectors.
Rather than debating whether recent share price moves are fully justified by underlying fundamentals, it is important to recognise the role investor psychology plays during periods of strong momentum and concentrated market leadership. History shows that maintaining discipline can become increasingly difficult when a relatively small group of stocks appears to generate outsized returns with little resistance.
In that context (FOMO), the following observation from economic historian Charles Kindleberger, highlighted by investor Howard Marks, remains quite pertinent:
“There is nothing as disturbing to one’s well-being and judgment as to see a friend get rich.”
Even the greatest investor, Warren Buffett, has acknowledged similar feelings in the past:
“You can’t stand to see your neighbour getting rich. You know you’re smarter than he is and he’s doing these things and he’s getting rich.”
Although not related to the above quote, the greatest investor of all time is currently sitting on c.$400 billion dollars of cash, with Berkshire Hathaway shares down just over 2% year to date.
However, this is far from the first time Warren Buffett has remained patient during periods of market exuberance. During the dot-com boom, Berkshire Hathaway largely stayed on the sidelines as technology valuations surged and many questioned whether Buffett’s investment approach had become outdated. While this caution proved painful in the short term, Berkshire’s disciplined positioning was ultimately vindicated when the bubble burst and markets corrected sharply. The episode remains a useful reminder that maintaining discipline during periods of concentrated enthusiasm can feel uncomfortable at the time but may prove valuable over a full market cycle.
We think our current views and actions are best highlighted by Ben Inker in GMO’s (founded by Jeremy Grantham) Q4 2025 quarterly letter:
“Plenty of other risk assets are trading at fair or even compelling valuations, and even if today’s financial markets turn out to be rationally priced, there is no long-run expected return give-up for tilting your portfolio away from the AI darlings and into those other assets.”
The diagram above highlights that, due to elevated starting valuations, the expected seven-year real return for US large-cap equities, heavily weighted towards today’s AI leaders, is meaningfully negative. By extension, the MSCI ACWI Index, with approximately 62% allocated to US large caps, also appears likely to generate negative real returns over the same period. Of course, such outcomes are far from certain, with many market participants positioning for precisely the opposite scenario.
Importantly, unlike previous periods when valuations appeared stretched across almost all asset classes and regions, the opportunity set today appears more differentiated. The chart suggests that both large and small-cap companies outside the US continue to offer the prospect of attractive real returns over the next seven years.
Although the past month has been challenging, Tideway believes the long-term choice remains relatively straightforward. Tilting portfolios towards areas of the market where valuations are less extreme continues to offer the most attractive balance between prospective returns and risk.
Tideway continues to favour global managers (can allocate anywhere which fits their investment style) who demonstrate strong valuation discipline, remain benchmark agnostic, and apply a consistent long-term investment philosophy. Equally importantly, our managers pride themselves on looking beyond the market’s most crowded and fashionable areas in search of better long-term opportunities.
We continue to believe our managers’ (and Warren Buffett’s) ability to do this and generate healthy long-term returns for our clients, whilst diversifying risk.
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