SMF Update

Views from the Aviva Investors' Multi Asset Team

Published: 11 Aug 2026

Top 3 investment themes - July 2026

Geopolitics kept energy markets on edge
Geopolitics remained a key market driver throughout July, with shifting tensions between the US and Iran triggering significant volatility in energy prices. Brent crude initially fell towards $70 per barrel as diplomatic progress reduced concerns over disruption to the Strait of Hormuz. However, renewed conflict and attacks on energy infrastructure later pushed prices above $100, before easing back towards $88 as tensions moderated. These swings repeatedly altered expectations for inflation and interest rates, particularly in Europe and the UK, where economies remain more exposed to higher energy costs. While markets ended the month increasingly confident that a broader regional conflict could be avoided, the geopolitical backdrop remains fragile and remains a potential source of future market volatility.
Investors demanded proof that AI investment can deliver return on investment
Artificial intelligence remained the dominant theme in equity markets, but investor focus shifted from demand to profitability. Semiconductor shares experienced sharp volatility, with the Philadelphia Semiconductor Index falling almost 19% from its June peak before recovering strongly following resilient earnings and continued evidence of robust demand. However, investors became increasingly focused on whether spending on AI infrastructure can generate attractive long-term returns. Microsoft's results were well received after the company reported strong cloud growth (+43% YoY). In contrast, Meta's shares fell despite delivering revenue growth of +28% YoY, as investors focused on the rapid increase in AI-related spending and the resulting pressure on cash flow. The contrasting market reactions suggest investors are becoming more selective, rewarding companies that can demonstrate a clear financial return on AI investment rather than simply increasing spending.
Market leadership broadened as economic growth remained resilient
Global equity markets remained resilient despite higher oil prices, rising government bond yields and periods of weakness among some of the largest technology companies. US economic data continued to point to solid growth, while corporate earnings remained supportive, with S&P 500 profits expected to increase by around 30% year-on-year. Importantly, market leadership broadened beyond the largest technology stocks. While the traditional S&P 500 declined 1.5% during the month, the equal-weighted index gained over 2%, suggesting performance was increasingly being driven by the wider market rather than a handful of mega-cap companies. This broadening of returns is typically viewed as a healthier backdrop for equity markets, reducing reliance on a small number of stocks to drive performance. Bond markets remained more cautious, however, reflecting ongoing concerns around inflation, elevated government borrowing and the possibility that interest rates may stay higher for longer.

July 2026 market performance (GBP Terms1)

How did SMF perform ?

Growth assets

July was a tale of two equity markets. The dominant theme was a sharp reversal in the AI trade, with semiconductors having their worst month since 2008 (-20.6%), as investors reassessed valuations in the context of new Chinese competition, levels of capex and supply constraints. The impact was felt most acutely across Asia, where AI-linked markets struggled. For instance, Korea's KOSPI fell -22.2%, although it remains one of the strongest-performing equity markets globally this year, up +57%. Despite tech weakness, broader equity markets proved more resilient with the FTSE 100 up +3.7%, as they were supported by resilient economic data and easing energy prices towards month end. A late-month rebound in AI-related shares, helped by strong earnings from major technology companies such as Microsoft which recorded its best day since 2008, suggests investor enthusiasm for the theme remains intact despite increased volatility. Our overweight position to US energy added to performance given the renewed tensions, however our broad overweight positions detracted from performance.

Defensive assets

Defensive assets faced a more challenging backdrop this month as rising oil prices rekindled inflation concerns which pushed bond yields higher and prices lower. While the Federal Reserve, European Central Bank and Bank of England all left interest rates unchanged, investors increasingly questioned whether inflation would return to target as quickly as hoped. In the US, uncertainty around the Fed's policy outlook led to a sharp steepening of the Treasury curve, with the 30-year Treasury yield reaching its highest level since 2007. Elsewhere, German Bund yields rose to their highest level since 2011 as the ECB signalled that further interest rate hikes remained possible, while UK gilt yields also moved higher despite a relatively dovish message from the Bank of England. Given this, our overweight position to UK Gilts detracted from performance, whilst our overweight position to the Australian dollar added.

Alternative assets

Alternative assets were the standout performers in July, which was led by commodities. Renewed tensions between the US and Iran raised concerns over energy supply disruption in the Middle East, driving Brent crude oil up +23.6% over the month and up +48.1% year-to-date. Agricultural commodities also performed strongly, with wheat rising +10.1% and corn gaining +6.8%, supported by geopolitical tensions, supply concerns and weather-related risks linked to El Niño. Notably, our allocations to AIMS continued to add to performance, demonstrating its benefit in an environment where both equities and bonds struggled.

Active management themes in July 2026

Opened new overweight equity position

- We opened an overweight position in the Philadelphia Semiconductor Index relative to the S&P 500, due to strong earnings momentum and continued capital expenditure among key semiconductor companies, with the recent fall providing an attractive entry point.

- We also initiated an overweight position in Japanese equities, attracted by the combination of AI infrastructure exposure and a domestic economy emerging from decades of deflation. The market is benefiting from a more growth-oriented policy backdrop, with Prime Minister Takaichi signalling fiscal support and a willingness to temper overly hawkish monetary tightening. At the same time, Japan's corporate reform agenda continues to unlock shareholder value, supporting both earnings growth and higher valuations. While Japanese equities no longer trade at the deep discounts seen in recent years, we believe the improving earnings outlook and structural reform story provide further scope for upside.
Added to our overweight position in US equities

- We also added to our overweight US equity position, reflecting continued strength in corporate earnings. The latest earnings season has once again exceeded expectations. With 61% of companies having reported, blended earnings growth for the second quarter stands at an impressive 47.4% year-on-year, on track for the strongest earnings growth since 2021.
Opened an overweight position to UK Gilts

- We opened an overweight position in UK gilts after the recent rise in yields created an attractive entry point. Renewed tensions between the US and Iran pushed oil prices higher and triggered a sell-off in government bonds, driving gilt yields to levels we believe are too high relative to the underlying economic outlook. While higher energy prices can place upward pressure on yields, we believe the market reaction has been excessive, creating an opportunity to lock in attractive income levels and gains as yields fall.

July 2026 Performance

July Performance — Past performance is not a reliable indicator of future performance. Source: Morningstar as at 31 July 2026. Performance is shown net of fees. The launch date of SMF (pension) was 11/12/2017, SMF (bond) 18/02/2019, SMF II (pension) 30/06/2021 and SMF II (bond) 30/06/2021.

SMF Fund Price Adjustments

There were no price adjustments in July 2026.

SMF Strategic Asset Allocation

Q2 Performance — Source: Aviva Investors. This diagram is for illustrative purposes only, asset allocations are subject to change. The reference fund is SMF, based on its strategic asset allocation as at 31st August 2025.

Market outlook and positioning: what do we believe happens next?

An exceptional Q2 earnings season in the US has helped anchor market confidence, with earnings growth exceeding 47% year-on-year. More broadly, macro indicators continue to point to a resilient backdrop, with growth holding up better than expected despite mounting geopolitical and inflationary headwinds. The interim deal agreed between the US and Iran has brought down oil prices to pre-war levels, which has reduced inflation expectations. Whilst geopolitical risks remain, the ultimate impact will depend on whether traffic continues through the Strait of Hormuz, a critical global oil supply route.

In our central scenario, inflation risks for 2026 have moved higher while the growth outlook has softened, particularly in energy-importing regions such as the UK and Europe. That said, recent US earnings strength suggests large-cap companies remain well positioned to navigate the current environment.

On interest rates, central banks initially looked through the energy-driven inflation shock, but there has been growing hawkish stance from Central Banks across the globe, already reflected by an interest rate hike by the ECB. In a more adverse high oil price scenario, we cannot rule out further rate increases from the Bank of England or the Federal Reserve. We hold an overweight position to UK gilts relative to US Treasuries given differing rate outlooks.

Against this backdrop, the outlook for equities remains broadly positive, but with a wider range of outcomes. We retain overweight positions in the US, Japan and Emerging Markets, where growth dynamics remain relatively resilient. We also maintain selective exposure to European defence and banks, US Energy, and Semiconductors supported by longer-term structural themes.

We continue to hold an underweight position in the US dollar and sterling, alongside an overweight to the Australian Dollar.

Key risks

Investment/Objective risk - The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested.
Currency risk - The fund is exposed to different currencies. Derivatives are used to minimise, but may not always eliminate, the impact of movements in currency exchange rates.
Derivatives risk - Investments can be made in derivatives, which can be complex and highly volatile. Derivatives may not perform as expected, meaning significant losses may be incurred. Derivatives can have some degree of unpredictability (especially in unusual market conditions), and can create losses significantly greater than the cost of the derivative itself.
Emerging market risk - Investments can be made in emerging markets. These markets may be volatile and carry higher risk than developed markets.
Fixed Income risk - Investments in fixed interest securities are impacted by market and credit risk and are sensitive to changes in interest rates and market expectations of future inflation. Bonds that produce a higher level of income usually have a greater risk of default.
Specialist Funds risk - Some funds invest only in a specific or limited range of sectors. This will be set out in the fund’s aim. These funds may be riskier than funds that invest across a broader range of sectors.
Suspension of trading risk - Fund managers are often able to stop any trading in their funds in certain circumstances for as long as necessary. When this happens, cashing in or switching your investment in the fund will be delayed. You may not be able to access your money during this period.
This is a summary of the key risks. For further information on the full risks and risk profiles of the fund, please refer to the relevant Fund Factsheet.

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but, has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.

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