Alpinum Investment Management Q2 2026 Investment Letter

Summary Points

• Geopolitics dominated the quarter, as Venezuela, Greenland-related tariff tensions, and the Iran conflict disrupted trade routes, triggered an oil shock and revived stagflation concerns globally.
• The US economy remained broadly resilient, though growth slowed, labour markets softened at the margin, inflation stayed above target and the policy mix became increasingly politicised.
• Europe improved modestly from a lower base, supported by easing inflation, recovering PMIs and tighter peripheral spreads, before the Iran-driven energy shock revived stagflation concerns.
• China and Asia showed mixed but stable growth, with China near 5%, supported by exports and policy easing, despite weak demand and Strait of Hormuz-related energy risks.
• Markets were initially supported by resilient growth and improving earnings breadth, but rising oil prices, AI-led disruption and geopolitical escalation increased dispersion across sectors, styles and regions.
• Conclusion: While a severe recession remains unlikely, volatility has risen meaningfully and tail risks are no longer negligible. We have reduced market exposure, emphasizing on capital preservation. Within credit, selectivity and diversification remain essential. We continue to favour shorter-duration investment grade and high yield bonds as well as senior secured loans. In equities, we favour active rotation over broad beta. In this volatile environment, capital preservation remains paramount, while retaining flexibility to add equities and longer-duration bonds at more attractive levels if market weakness deepens.

Markets under geopolitical fire

Global markets began 2026 in a paradoxical environment of macroeconomic resilience overshadowed by intensifying geopolitical shocks. Given the elevated uncertainty, our current outlook is strongly scenario-based, reflecting the wide range of potential outcomes across risk dimensions. Growth across major economies remained broadly intact, with moderating inflation allowing central banks to maintain a cautious stance. The Federal Reserve kept rates near 3.5–3.75%, while the nomination of Kevin Warsh as the next Fed Chair introduced uncertainty around the future monetary policy framework. In Europe, inflation declined towards 1.9% and the ECB maintained rates, while China’s economy stabilised on strong exports and policy support despite fragile domestic demand.

Chart 1: Increasing geopolitical risk

Geopolitics dominated the quarter. The US operation removing Venezuela’s president, renewed tensions over Greenland accompanied by tariff threats towards European allies, and the US Supreme Court ruling limiting emergency tariff powers reshaped the global trade outlook. Most destabilising was the escalation of conflict with Iran, culminating in disruptions to shipping through the Strait of Hormuz and triggering an oil shock that revived stagflation concerns. Financial markets initially rallied before sentiment weakened, with equities diverging as AI infrastructure surged while software declined on disruption fears.

United States

In Q1 2026, the US economy entered the year with moderating but still positive momentum, then became increasingly shaped by policy uncertainty and geopolitical shock. January combined resilient activity with a fragile labour backdrop: the Fed left rates unchanged at 3.5-3.75%, Q4 2025 GDP was later confirmed at a soft 0.7% annualized after 4.4% in Q3, while labour conditions remained ‘low hire, low fire’, foreshadowing softer household demand. Inflation was not defeated but eased, with January CPI at 2.4% year on year, allowing markets initially to retain a Goldilocks interpretation even as tariff threats over Greenland, renewed concerns over Fed independence and a brief government shutdown unsettled sentiment. Fiscal policy remained noisy, reactive and increasingly subordinated to politics.

Chart 2: Strait of Hormuz daily ship crossings (bidirectional)

February was characterised by macro resilience but persistent price pressures and mounting political noise. Manufacturing re-entered expansion, services stayed firm, January payrolls surprised positively and the unemployment rate dipped to 4.3%, yet hotter producer prices, debate over Kevin Warsh’s nomination and the Supreme Court’s rejection of Trump’s prior tariff regime reinforced uncertainty around the future monetary policy mix. Equities rotated decisively away from mega-cap software and other AI-exposed growth franchises towards value, cyclicals, small caps, materials, utilities and energy. In March, the macro narrative was overwhelmed by Iran. The closure of the Strait of Hormuz, surging oil prices and rising inflation expectations tightened financial conditions, while in February nonfarm payrolls fell by 92,000 and unemployment rose to 4.4%, complicating the Fed’s outlook. US equities turned more defensive and bifurcated, whereas Treasuries faced a stagflationary tension between growth fears and energy-driven inflation risk.

Europe

Europe moved through Q1 2026 in a regime of modest cyclical improvement, fading disinflation and rising geopolitical fragility, with the macro picture gradually shifting from cautious optimism toward stagflationary concern. Across the euro area, late-2025 resilience carried into early 2026: GDP expanded 0.2% in Q4, business activity remained in expansionary territory, and by February the composite PMI had risen to 51.9 as manufacturing finally re-entered growth. Germany showed tentative stabilization in industry and softer February inflation at 1.9%, while France and Italy benefited from improving risk perception, narrowing peripheral spreads and reduced political tail risk, reinforced by France’s budget progress. Inflation initially evolved favourably, with euro area headline HICP falling from 1.9% in December to 1.7% in January and core easing to 2.2%, allowing the ECB to hold its deposit rate at 2.0% and preserve scope for later insurance cuts.

Chart 3: Price development of Brent and natural gas

Equity markets reflected this broadening recovery and global rotation away from concentrated US technology leadership, with European performance led by cyclicals, energy, utilities, defence, real estate and selected value segments, while UK equities benefited from their commodity and large-cap bias. Bond markets also improved, as gilts outperformed in February and peripheral sovereign debt remained supported by carry and compression dynamics. By March, however, the escalation of the Iran conflict and the associated surge in oil and gas prices exposed Europe’s structural energy vulnerability, lifted inflation expectations, pushed euro area headline inflation back to 1.9% and core to 2.4%, and triggered a hawkish repricing in rates alongside a more defensive, bifurcated market tone

China and emerging markets (EM)

China entered Q1 2026 with respectable headline growth but an increasingly uneven macro mix. Real GDP expanded 5% in 2025, meeting Beijing’s target, yet the composition remained unbalanced: industrial output rose 5.9% while retail sales dropped just 3.7%; fixed-asset investment fell 3.8% and private investment dropped 6.4%; property investment remained deeply contractionary, underscoring persistent weakness in domestic demand, and consumer sentiment remained cautious overall. Consumer inflation accelerated to 1.3% year on year in February, with core CPI rising 1.8% and producer-price deflation narrowing to -0.9%, suggesting firmer seasonal demand but not a decisive exit from China’s broader low-inflation environment. Authorities reaffirmed a 2026 growth target of 4.5%–5%, a budget deficit around 4% of GDP, stronger support for consumption, technology and employment, and an ‘appropriately accommodative’ monetary stance, with the PBoC signalling flexibility to use reserve-ratio and rate tools while preserving exchange-rate stability.

Chart 4: China’s energy security runs through Hormuz

Official PMIs softened to below 50, but private surveys painted a firmer picture, culminating in a February services reading of 56.7 and composite PMI of 55.4. Equity performance therefore lagged behind North Asian peers and remained highly selective, with China underperforming relative to broader emerging Asia. Bond markets were steadier, supported by muted inflation, policy accommodation and China’s relatively insulated capital account. The US-Iran conflict nonetheless introduced a material energy tail risk : roughly 20% of global oil transits the Strait of Hormuz, and around 45% of China’s crude imports move through that corridor, while direct Iranian barrels account for about 13-14% of China’s total imports, implying manageable near-term resilience but meaningful exposure under a prolonged disruption scenario.

Investment conclusions

Recent months have reaffirmed a broadly constructive macro backdrop, with US activity remaining resilient and Europe stabilising from a lower base. Beneath that surface, however, markets were unsettled by intensifying geopolitical shocks and a new phase of AI-led disruption. Anthropic’s release of increasingly autonomous agents accelerated the reassessment of technology and software business models, widening dispersion between structural beneficiaries and those facing margin pressure or obsolescence risk. Simultaneously, the outbreak of war involving Iran has materially elevated volatility and introduced a still insufficiently priced tail risk to global growth and inflation. Against this backdrop, we have reduced market exposure, carefully balancing capital preservation with selective opportunism, while our portfolios remained robust.

Chart 5: Liquid Alternatives benefits from high dispersion

Bonds: Geopolitical stress and higher input costs have pushed rates higher as inflation fears re-emerged, while credit spreads have widened materially. Default rates may rise in 2026, but a broad-based credit event remains unlikely, creating more attractive entry points in both investment grade and high yield. Selectivity and diversification remain essential. We continue to favour shorter-duration investment grade and high yield bonds as well as senior secured loans, where carry remains attractive and duration risk contained.

Equities: In the near term, we retain a neutral stance. If Middle East tensions ease, the most affected markets could rebound and offer selective opportunities. Elevated valuations and rising dispersion favour active rotation over broad beta. In this volatile environment, capital preservation remains paramount, while we stay prepared to add equities and longer-duration bonds at more attractive levels if market stress intensifies.