Investors must ensure portfolios are allocating risk actively and have a balance of risks across regions, asset classes and sector – now more than ever – says Vincent McEntegart, Investment Manager at Aegon Asset Management.
Market returns in recent years have been strong and despite the headlines, it has been a decent first half in 2026.
A recent survey of UK Financial Advisers revealed that capital loss (36%) and geopolitical risk (32%) were the top two client concerns. With new Inheritance Tax rules for pensions coming in 2027, tax was also identified as a significant concern for advisers*.
In the short-term, the good news is that capital loss can be mitigated in nominal terms by holding cash on deposit, in money market funds and in short dated fixed and floating rate bonds and loans.
A UK investor can expect to earn between 3% and 5% per annum, subject to the level of credit risk and liquidity risk they are willing to accept.
With the UK Consumer Price Index (CPI) at 2.8% for the year to 31 May 2026, investors currently have a positive excess yield above CPI on these assets. The real value of their capital is protected, for now – the “price of safety” has been low returns on cash.
The future path for UK inflation is difficult to predict. Higher and sticky inflation is the result of several factors including higher oil and gas prices, declining consumer purchasing power creating demand for higher wages, which in turn prevents services inflation from cooling.
Despite these pressures, the lower-than-expected May CPI of 2.8% allowed the Bank of England to hold its policy rate at 3.75% on 18 June, avoiding a rate rise that had seemed possible in recent weeks.
For many investors and advisers, returns that are modestly above inflation are not enough to meet their financial objectives. Their retirement pots need to generate enough income to live comfortably, 4%-5% per annum typically.
In addition, the capital value of retirement pots net of income needs to outlive them, often requiring an element of capital growth to do so. Simple but not easy. The pursuit of these “simple” financial objectives elevates capital loss to the top of the “concern charts”.
It is reasonable to assume that capital loss concerns include the possibility that the current AI boom will follow historic patterns. Revolutionary technologies trigger cycles of intense market euphoria, massive over-investment and, eventually, a market correction.
Technology has become so important to stock market levels that in the eyes of market participants it has become “too big to fail”. Big Tech is bigger and more structurally dangerous than the banks were in 2008, when the phrase “too big to fail” entered the cultural lexicon.
Building AI models requires billions of dollars, vast data centres and advanced semiconductors. A huge amount of global capital, retirement pensions and index funds are tied up in just a small number of companies.
Unlike banking, which is regulated by oversight bodies and has strict capital requirements, the tech sector lacks a global regulatory framework designed to handle structural insolvencies.
2026 is the AI “Prove-It” year with investors wanting to see a return on the huge capital investments. For now, the mega-cap companies leading the rally are highly profitable and are using their financial strength to fund the massive AI capital expenditure.
And the demand for the physical hardware is real, providing strong revenue streams for a range of hardware suppliers.
The market is rewarding companies receiving the capital expenditure but is less certain about the companies doing the spending. Additionally, companies providing services that may be replaced by new AI tools have been downgraded meaningfully.
If the AI narrative stumbles significantly or a tech giant has a catastrophic event, it would drag down the entire stock market and by extension the real-world economy, savings and employment numbers across unrelated industries.
We will be watching earnings results for evidence of returns on capital invested and for signs of any slowdown in future investment intentions.
Geopolitical risks are almost equally as concerning for UK advisers. Geopolitical risks continue to rise, along with supply chain risk. After a long period of integrating global supply chains, de-globalisation is on the increase and we now see evidence of a world splitting into two blocks, Western-aligned and BRICS+ (Brazil, Russia, India, China, South Africa plus others). A consequence will be reduced efficiency and higher costs.
Wars are not just regional, but threaten global shipping and trade, including the flow of semiconductors, the lifeblood of the modern economy.
Structurally lower economic growth is not helping fiscal sustainability. Developed market government debt is forecast to be $76 trillion by end 2026.
With interest rates at current levels (and cuts looking less likely) the cost to governments and taxpayers of paying for this borrowing is much higher.
With larger portions of national budgets consumed by debt interest payments, there is less available to pay for defence, healthcare and welfare.
These threats are interacting to create a high-stakes environment for global markets for the remainder of 2026.
Now more than ever investors must ensure portfolios are allocating risk actively and have a balance of risks across regions, asset classes and sectors.
*Source: Schroders UK Financial Adviser Pulse Survey
Main image: background, multi, colour, tile, andrew-ridley-jR4Zf-riEjI-unsplash
