Keep Calm and Carry On

June brought no shortage of reasons for investors to be cautious, the Israel–Iran conflict escalated sharply, the World Bank lowered its global growth outlook, and the Federal Reserve (Fed) downgraded US growth projections while raising its inflation forecasts—prompting talk of “stagflation”. Despite these challenges, equity markets proved resilient. The US stock market posted gains for the month. Commodities performed strongly, supported in part by tensions in the Middle East, while bond markets also saw modest price gains.

On the evening of June 13th Israel launched a surprise attack on Iranian nuclear facilities, military sites, and populated areas. Within days the conflict escalated significantly when the US intervened through an attack on Iran’s underground nuclear facilities, as described in our note ‘Iran-Israel Conflict’. Despite a very well signposted retaliation from Iran who conducted a missile strike on a US air base in Qatar, the countries swiftly reached a ceasefire agreement. Oil prices rallied as events unfolded but equities ultimately shrugged off the turmoil, registering only a brief, modest dip before stabilising.

Last month, the World Bank revised its forecasts for global GDP growth to 2.3% in 2025 and 2.4% in 2026, down by 0.4 and 0.3 percentage points from January’s projections. These revised figures also sit below the roughly 3% growth rates recorded in 2022, 2023, and 2024. Developed economies saw sharper forecast downgrades than emerging markets, with much of the change attributed to evolving trade policy and tariff impacts, especially in the US. On the same theme, the Federal Reserve downgraded its US growth expectations and increased its inflation forecasts because, as Chair Powell states, “someone has to pay for the tariffs”. Near-term inflation pressures are a key reason for the committee not delivering the rate cuts that Trump has publicly been calling for. The Administration’s sensitivity to high interest rates is understandable given that debt servicing costs have become the largest single budget line item, surpassing even defence spending. Current Fed projections suggest roughly half of the committee expects just one or no rate cuts for the remainder of the year, posing an ongoing headwind for equity markets that would benefit from lower borrowing costs for consumers and businesses. Markets may therefore be excited by the end of Powell’s term as chair in May 2026 when it appears likely that Trump will nominate a successor that will be an individual that aligns closely with his own desire for lower rates. Over the month, bond markets looked through any potential near-term inflation pressures with bond prices rising.

So, despite the negative headlines and challenges, there are several reasons that stock markets remained buoyant in June. Firstly, investors have, historically, learned not to panic in response to geopolitical turmoil as the actual impact on the global economy is usually limited and temporary. Secondly, regarding lower growth forecasts and the impact of tariffs, investors have kept the “TACO” phenomenon, whereby Trump Always Chickens Out, at the front of their minds causing fears over dramatic policy changes to dissipate. In the end, US stocks rose 5%, 3% in sterling terms, to end the month at a record high and, with little fanfare, the main UK stock index also (briefly) achieved a new record high in June. The UK has been a beneficiary of Trump-fatigued investors searching for opportunities outside the US in recent months. Moreover, lower valuations and a stable government have likely helped, and Sterling continued to appreciate against the US dollar last month. However, surveys now point to sharp underweights, relative to history, in US dollar exposure. Therefore, while asset allocators may continue to diversify away from such heavy reliance on the US over the long term, positioning now questions the extent to which the US dollar can keep falling over the short term.

Bottom Line

Many uncertainties remain for asset markets—geopolitical tensions, the impact of tariffs, and central bank actions among them—so we cannot afford to be complacent despite recent gains. We continue to expect government spending to remain elevated, supporting economic activity, albeit at a potentially slower pace. Inflation may rise modestly as a result of US tariffs and higher commodity prices, but this is unlikely to be sufficient to cause significant concern.

Q&A

What is Going on in Emerging Market Equities?

Emerging market (EM) equities have enjoyed a strong start to the year. For sterling-based investors, the EM index is up around 5% year-to-date, while US equities remain down 3.5%. Although EM performance still lags European equities, this marks a meaningful reversal after years of underperformance in which EM equities trailed the US by 17% in 2023 and 18% in 2024. Several factors are driving this shift. Investors, cautious about the current US administration, have been diversifying their allocations, with flows naturally supporting EM equities that continue to offer better value than many developed markets. Currency dynamics have also been favourable: a softer US dollar has improved EM returns for sterling investors and eased the burden of widely held USD-denominated debt across emerging economies. Beyond these mechanical drivers, the fundamental backdrop is strengthening as earnings prospects improve in many regions. In China, policymakers are stepping up stimulus and credit support to stabilise growth, while the technology sector is regaining momentum thanks to renewed confidence in AI and companies like DeepSeek. Meanwhile, economies such as Brazil are benefiting from strong global demand for commodities, supporting corporate profits and market performance. Taken together, these trends are providing a stronger fundamental case for Emerging Market equities after a period of weaker relative returns, and we continue to maintain exposure to the region across our portfolios.

A European Oil Mega-Merger

Reports last week from The Wall Street Journal suggested that Shell was in early-stage discussions to acquire BP in a deal potentially valued at around $80 billion, one of the largest prospective mergers in the history of the energy sector. News of the potential mega-merger sent BP’s share price soaring by over 7%, reflecting strong investor enthusiasm. However, Shell swiftly issued a public denial, stating that no such talks had occurred and that it was not actively considering an offer. Following the statement, BP’s stock gave up most of its gains, ending the day up a more modest 1.6%. Despite Shell’s denial, many observers believe the merger remains a possibility, highlighting the perceived undervaluation of UK oil majors like BP.

The rationale behind such a deal is clear: a merger would create a European energy powerhouse capable of rivalling larger competitors like U.S. oil giant ExxonMobil. Yet, despite the strategic appeal, the path to such a transaction is fraught with challenges—including regulatory scrutiny, complex integration issues, and cultural differences between the two companies. Furthermore, under UK takeover rules, Shell’s formal denial now bars it from making a new approach for six months unless circumstances change. While the merger remains speculative, the episode highlights the shifting dynamics of the global energy landscape and the mounting pressure on traditional oil majors to adapt and stay competitive in a rapidly changing market.