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27 July 2026

Many investors are worried about valuation bubbles. Depending on your perspective, these are either justified – based on supernormal profits and strong productivity – or a red flag for low future returns. But if you’re worried, what do you do? It’s a tougher question than usual because some traditional diversifiers have lost hedging power. Neither gold nor G7 bonds were reliable portfolio protectors during the market volatility in H1. There are three choices:

#1 Look beyond traditional bonds, but don’t abandon them. Many investors have been turning to “bond substitutes”, such as hedge funds. That makes sense – but there is still a case for G7 bonds too. After all, UK gilts outperformed the Magnificent Seven stocks in H1. But investors need to be careful; term premia are rising, and fiscal risks are top of mind. Shorter duration bonds could be a better way to take advantage of higher-for-longer rates.

#2 Income is back. There are income opportunities across emerging markets, credit and global stocks that can provide ballast to portfolios – even if they don’t hedge perfectly. Think real assets (like infrastructure), selective parts of private credit, or dividend-focused equity strategies.

#3 Consider the “anti-bubbles”. These are parts of the market with the opposite characteristics of frothy bubbles: limited investor interest, relatively low valuations, and more sensitivity to potential rate cuts. By being less crowded – and more ignored – they may hold up better in a sell off. Examples include Europe and Asia, especially, China. This could be the most intriguing way to help protect a portfolio this summer. 

Using stock screens to filter out unwanted parts of an index is a common way of managing portfolios. In sustainable investment, it can be used to avoid climate risks, align portfolios to clients’ sustainability goals, and meet regulatory demands. One trade-off is that screening can cause portfolios to drift from the index – so it’s important to assess the impact on returns.

Small, focused exclusions – like stripping out coal producers – tend to leave returns and risk almost unchanged. But broad “zero tolerance” screens – for example, excluding oil & gas – can make portfolios behave meaningfully differently from the benchmark. That can cause noticeable relative under- or out-performance.

The impact of screens also depends on factors like the baseline year, market environment, and investment time horizon. For example, at the 10-year mark, the impact tends to be neutral or even positive. The direction of energy prices is also important, with EM indices more affected given their bigger weight in commodity names.

Overall, climate screens can be an important tool – but investors need to find a level of strictness that balances their objectives and tolerance for diverging from the benchmark. 

It is an environment where developed market bond yields are likely to remain high and more volatile than in the past.

Active management remains central. The goal is not to maximise headline yield, but to scrutinise it — assessing leverage, free cash flow coverage and reinvestment needs, and diversifying across defensive, cyclical and growth names, while avoiding dividend traps built on fragile balance sheets.

Of course, there are risks to monitor. The yen could appreciate suddenly, or global volatility could spike if the AI trade wobbles. But for the time being, calmer markets and a cheap yen are likely to keep this trade in fashion.

Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg, Refinitiv, FactSet. Data as at 7.30am UK time 24 July 2026.

For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management. Data as at 7.30am UK time 24 July 2026.

Persistent Middle East tensions lifted energy prices and core sovereign bond yields, weighing on sentiment. The US Treasury curve bear-flattened ahead of this week’s FOMC meeting as higher oil prices reinforced market expectations of Fed tightening. European yields also rose, as ECB President Lagarde signalled a near-term wait-and-see stance, citing potential second-round inflation effects. In equities, major US stock indices weakened on renewed doubts over AI investment returns as investors digested Q2 earnings from tech heavyweights, despite a rebound in the Philadelphia semiconductor index. European bourses edged lower, while the FTSE 100 moved higher. Asian stocks were mixed. The Nikkei 225 rebounded slightly, while the Kospi reversed gains, extending weekly losses.  The Hang Seng and the Shanghai Composite rose, whereas the Sensex declined on rising trade concerns. In FX, the US dollar generally strengthened against major peers, with the JPY refreshing a multi-decade low.