Kevin Boscher, Head of Jersey & CIO of Channel Islands provides his commentary over the last quarter.

Rising government bond yields, renewed tensions in the Gulf, higher energy prices and further trade disputes have given investors plenty to consider.

It would be understandable to become more cautious in this environment. However, I remain broadly positive about the outlook for shares. The global economy continues to show resilience, company profits are growing and investment in artificial intelligence is supporting demand.

The risks are building and should not be ignored. For now, though, I believe the wider environment remains supportive of investments such as shares, even if markets become more unsettled.

Key points

• Government bond yields are adjusting to a world of stronger growth, higher debt and more persistent inflation.
• Higher yields are a risk, but they are not yet causing a wider financial or economic crisis.
• Company profits remain an important source of support for global share markets.
• AI investment could provide a long-term boost to productivity, although expectations may have moved too far in some areas.
• Opportunities may be broadening beyond the largest US companies into Japan, selected European markets and emerging markets.
• Commodities and gold may benefit from geopolitical uncertainty and the demand for energy and infrastructure.
• We expect the US dollar to weaken gradually over the next few years, although currency movements are difficult to predict.
• Key risks include a rapid rise in bond yields, an error by the US Federal Reserve, disappointing returns from AI investment and further geopolitical shocks.

Bond markets are adjusting to a new normal

Government bond markets have come under pressure in recent weeks. In several major economies, the yields available from 10-year and 30-year bonds have reached their highest levels since 2007. A bond yield is the return an investor can expect from holding a bond. Bond prices and yields move in opposite directions, so when yields rise, the value of existing bonds generally falls.

There are several reasons why yields have risen. Governments are borrowing more, central banks are reducing the bond holdings built up through quantitative easing, economic growth has remained firm and inflation is still above the levels seen before the pandemic. Much of the recent increase has also come from higher returns after inflation, rather than a sharp change in inflation expectations. This is concerning, but I do not believe it represents a bond market crisis at present. That could change if yields rose very quickly or markets became disorderly.

The period between the 2008 global financial crisis and 2020 was unusual. Economic growth was weak, inflation was persistently low and interest rates were close to zero. Consumers and companies were reducing debt, while central banks bought bonds to support the economy and keep borrowing costs down.

Today’s environment is different. Economic growth is stronger in cash terms, consumers have remained resilient and investment linked to AI is increasing. Government debt is higher, geopolitical risks have grown and all major central banks have moved away from zero-interest-rate policies. Bond markets are therefore reflecting a world that appears riskier. Investors are asking for a higher return to lend to governments for long periods.

So far, the rise in longer-term yields has not significantly increased borrowing costs for most households and companies. Corporate bond markets also remain relatively stable. A further sharp rise, however, could slow economic growth and place pressure on share prices.

Central banks face difficult choices

Central banks must balance inflation, economic growth and financial stability.

The US Federal Reserve raised interest rates in September. Its Chair, Kevin Warsh, has taken a relatively firm position on inflation, despite pressure from President Trump to reduce rates. Higher energy prices and new tariffs could add to inflation, although investment in AI may eventually increase productivity and help lower costs.

US Treasury Secretary Scott Bessent has also announced plans to use Treasury funds to buy longer-dated government debt in an attempt to limit the rise in yields. So far, this has had little effect on markets.

Investors now expect a further three or four US interest-rate increases over the next year. Expectations have also moved towards higher rates in the UK, Europe and Japan. In my view, markets may be expecting the Federal Reserve to raise rates more aggressively than it ultimately will.

Over the longer term, governments face difficult decisions about high debt and spending. There appears to be limited appetite for spending cuts or tax increases that could cause economic pain. This may mean that policies remain supportive of the economy, even if inflation becomes higher and less predictable. Central banks are also likely to act if a rapid bond-market fall threatens financial stability, as happened during the UK gilt crisis in 2022.

Company profits continue to support shares

Strong company profits have been one of the main drivers of share markets over the past year.

US companies delivered rapid earnings growth in the second quarter, with 10 of the 11 sectors in the S&P 500 reporting positive results. Earnings also grew across a broad range of companies in Europe, Japan and emerging markets. Several factors have contributed. These include investment in AI, lower US tax rates, rising productivity, lower corporate borrowing and stronger economic growth.

There are valid concerns that current profit margins may be difficult to sustain, particularly if bond yields continue to rise. Even so, the global economy is experiencing strong growth in company revenues and earnings, supported by AI-related demand and government and central bank policies.

Previous technological developments have created long periods of investment as businesses and consumers adopted new products. During the height of the internet revolution, global semiconductor sales, adjusted for inflation, increased fivefold between 1992 and 2000. By comparison, they have risen by around 80% since 2025.

AI investment may therefore have further to run. However, investors should not assume that every company connected with AI will succeed or that the prices of AI-related shares will continue to rise. We may be experiencing an AI bubble in parts of the market, and disappointment could cause significant volatility.

Interestingly, valuations for some semiconductor businesses have fallen while their revenues and profits have risen sharply. This suggests investors have not simply assumed that recent earnings growth will continue indefinitely.

Overall, I remain positive about global shares. However, I expect market leadership to broaden beyond the largest US companies. We currently see opportunities in value and economically sensitive companies, as well as in Japan, selected European markets and emerging markets, where valuations are generally lower and economic and profit growth is improving.

Positioning investments for a changing world

In bond markets, we generally prefer shorter-term bonds because their prices are usually less sensitive to changing interest rates. This is sometimes described as limiting “duration risk”.

Longer-term US and UK government bonds are starting to offer more attractive yields, particularly after inflation, although uncertainty surrounding oil prices and tensions in the Gulf means care is still required.

We also continue to see opportunities in higher-quality corporate bonds. Emerging-market bonds could benefit from global economic growth, recovering trade and a weaker US dollar, although we favour an actively managed approach. Index-linked bonds, whose payments adjust with inflation, may also provide some protection if inflation becomes more volatile.

The longer-term case for commodities and gold

We believe commodities remain in a long-term period of rising demand. Economic growth, geopolitical tensions, changes in global trading relationships and investment in AI infrastructure are all increasing the need for energy and raw materials.

Gold prices have stabilised following a substantial fall after the start of the Iran war. The longer-term factors that supported gold in recent years remain in place. These include high government debt, concerns about inflation and currency values, geopolitical uncertainty and demand from investors and governments seeking to reduce their reliance on US dollars and government bonds.

China has been a significant buyer of gold during the recent period of lower prices. There is also growing discussion about whether China may seek to conduct more trade in currencies other than the US dollar, potentially with some connection to gold.

In our view, gold, energy-related investments and other commodities can provide long-term opportunities and help diversify a portfolio. However, their prices can be highly volatile, and diversification does not guarantee against losses.

What could a weaker dollar mean?

The US dollar has remained resilient because of the strength of the US economy and expectations that interest rates will stay higher.

Over the next few years, however, I expect the dollar to weaken gradually. Factors behind this view include the US government’s budget and trade deficits, improving growth outside the US and a desire among some governments and investors to reduce their reliance on dollar assets. Other central banks may also raise rates further than the Federal Reserve. This could include the European Central Bank and, in particular, the Bank of Japan.

Japan has been gradually returning interest rates to more normal levels as economic growth strengthens and inflation stabilises close to its 2% target. The yen remains inexpensive compared with other major currencies and could benefit if Japanese investors bring overseas investments back home.

The Chinese yuan and other Asian and emerging-market currencies could also strengthen against the dollar. Sterling may be vulnerable in this environment. A weaker dollar could support global growth and may be particularly helpful for emerging markets, but currencies can move unpredictably and may not follow this expected path.

Opportunity, but not without risk

The outlook remains broadly supportive, despite higher interest rates, rising bond yields, tensions in energy markets, new US tariffs and political uncertainty.

The most immediate risk is that government bond yields continue to rise and the move becomes disorderly. This could threaten financial stability, slow economic growth and place pressure on shares and bonds.

Other risks include:

• AI-related investment taking longer than expected to generate profits
• the Federal Reserve raising rates too far
• a further geopolitical or energy-market shock
• inflation remaining higher or becoming more volatile
• markets becoming more unsettled as we move towards 2027

I remain positive about the longer-term outlook for shares, but it is important not to become complacent. The changing economic environment

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