SMF Update

Views from the Aviva Investors' Multi Asset Team

Published: 07 Oct 2026

Top 3 investment themes - Q3 2026

Despite a challenging backdrop of rising inflation and higher interest rates, global equities delivered a modest positive return of +1.5% over Q3. Resilient economic growth and corporate earnings continued to exceed expectations, however, equity market gains were relatively narrow, with performance concentrated in a small number of technology companies focused on the roll out of artificial intelligence. Global bond markets faced a more challenging environment, driven largely by the escalation of the US-Iran conflict which pushed Brent crude oil up +42.0%. Broader commodity markets also gained +14.6% in USD terms, reigniting inflation concerns and contributing to a global bond market sell-off which led global government bonds to fall -2.3% in GBP terms over the quarter.

Commodity prices reignited inflation fears
The dominant theme of Q3 was a fresh inflation shock driven by escalating tensions in the Middle East. Commodity markets rallied sharply, with Brent crude oil rising 42% over the quarter to finish above $100 per barrel. The strength wasn't limited to energy, with broader commodities also up +14.6%, which was led by European natural gas (+67%), sugar (+23%) and corn (+21%). The rise in energy and food prices raised concerns that inflation could remain more persistent than investors had hoped.
2. Central Banks returned to rate hikes
The combination of higher inflation and resilient economic growth prompted central banks to resume raising interest rates, with the Federal Reserve, European Central Bank and Bank of Japan all tightening policy during the quarter. Investors increasingly priced in a "higher-for-longer" interest rate environment, leading to a sharp sell-off in government bonds. US 10-year Treasury yields rose to 5.3%, their highest level since 2007, while German 10-year Bund yields climbed to 3.6%. Fiscal concerns also began to emerge, particularly in Europe, with the gap between French and German government bond yields widening to its highest level since 2012. As a result, government bonds were among the weakest-performing asset classes during the quarter.
Equities continued their rally
Despite higher inflation, rising interest rates and a sharp sell-off in bond markets, global equities delivered modest positive returns overall. While resilient economic growth and robust corporate earnings provided some support, gains were concentrated in a small number of technology companies benefiting from continued enthusiasm around AI and expectations that substantial AI-related capital expenditure would continue. The S&P 500 gained 2.3% over the quarter and reached a new record high in August, with the Magnificent 7 returning 11.1%. Outside of technology, returns were generally weaker as higher interest rates weighed on more economically sensitive sectors, like consumer staples. Reflecting this challenging backdrop, Europe's STOXX 600 finished the quarter down 0.6%, while South Korea's KOSPI retreated 19.2% after its exceptional Q2 rally.

Q3 2026 market performance (GBP Terms1)

How did SMF perform ?

Despite the volatility seen in fixed income markets in the latter half of the quarter, there were no price adjustments in Q3 which meant that both SMF and SMF II trended upwards in line with their growth rate, delivering 2.0% and 1.7% respectively. Year-to-date, performance remains strong, with the portfolios delivering extremely strong performance following an upwards price adjustment earlier in the year.

Growth assets

Global equities delivered +1.5% over Q3, but beneath the surface the picture was far from uniform. Technology-heavy markets such as Japan (+5.9%) and Asia Pacific (+4.4%) led returns, while more defensive regions like Europe fell -2.5%. By maintaining a global market-cap approach, SMF naturally participated in the strongest areas of the market, benefiting from the breadth of opportunities available across regions rather than relying on any single market to drive returns. It was also a strong quarter for our tactical equity positioning. Our overweight allocation to European Basic Resources was the standout contributor, benefiting from higher commodity prices and the broader macroeconomic backdrop. Regional overweight positions in Japan and the US also added value, while our overweight position in European equities modestly detracted from returns.

Defensive assets

Global government and corporate bonds faced a difficult quarter as major central banks resumed raising interest rates in response to rising inflationary pressures. Despite this, overall performance remained resilient enough to avoid a price adjustment.

Tactically, our underweight position in US Treasuries added value, helping offset some of the weakness elsewhere, while our overweight position in UK gilts detracted as yields moved higher.

Alternative assets

Alternative assets helped boost performance in Q3. were the standout performers in August. Notably, our allocatiot to the AIMS total return fund continued to add to performance, demonstrating its benefit in an environment where both equities and bonds struggled, as it benefited from its underweight position in US Treasuries.

Active management themes in Q3 2026

1. Reduced regional positions in favour of targeted trades

We reduced our overweight regional European equity position to concentrate our risk-taking in higher conviction sectors.
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 pullback in July providing an attractive entry point.
We diversified our energy exposure by reducing our allocation to US energy and increasing exposure to European energy. This helped lower concentration risk while also providing a hedge against the potential impact of a US diesel export ban, which would likely affect US producers more directly than their European counterparts.

2. 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.

3. Reduced our overweight position to AUD vs GBP

We remain constructive on the Australian dollar as a beneficiary of global growth, but reduced the position tactically ahead of a Reserve Bank of Australia (RBA) meeting where markets were pricing very little change. With the balance of risks skewed towards a more cautious central bank message, we reduced risk while retaining the core conviction.

Q3 2026 Performance

SMF Fund Price Adjustments

There were no price adjustments in Q3 2026.

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

Global growth has continued to prove more resilient than expected despite higher energy prices and ongoing geopolitical uncertainty. Recent activity data, particularly in the US, have surprised to the upside, supported by strong business investment, resilient consumer demand and continued AI-related spending. While initial optimism around a US-Iran diplomatic breakthrough temporarily eased pressure on energy markets, oil prices have since moved higher again as concerns around potential disruptions to traffic through the Strait of Hormuz persist. As a result, inflation risks remain elevated, particularly given the strategic importance of the region to global energy supply.

In our central scenario, the balance of risks has become more complicated. Growth remains positive across major developed economies, and recession risks continue to appear low, but the likelihood of a more prolonged energy shock has increased. This could weigh on real incomes, confidence and investment, particularly across energy-importing regions such as the UK and Europe. Nevertheless, recent economic and corporate fundamentals suggest that large-cap companies remain relatively well positioned to navigate the current environment.

On interest rates, central banks have become increasingly concerned about the combination of resilient activity and persistent inflation. Markets have repriced expectations for further policy tightening, with the ECB maintaining a hawkish stance and both the Federal Reserve and Bank of England facing pressure to keep rates higher for longer should energy prices remain elevated. Against this backdrop, we continue to favour UK gilts relative to US Treasuries, where stronger domestic growth provides greater justification for higher policy rates and bond yields.

Against this backdrop, the outlook for equities remains constructive, although the range of potential outcomes has widened. We retain overweight positions in the US, Japan and Emerging Markets, where growth dynamics remain comparatively resilient. We also maintain selective exposure to European defence and banks, US and European Energy, and Semiconductors, supported by long-term structural themes and continued investment in technology and infrastructure.

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

Key risks

Any companies, or markets, mentioned are for illustrative purposes only, not intended to be an investment recommendation.

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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