Mid-Year Outlook 2026: Staying Defensive After an AI-Driven First Half

Mid-Year Outlook 2026: Staying Defensive After an AI-Driven First Half

With the exception of energy, every outperforming investment theme this year has been driven, directly or indirectly, by AI and the associated wave of capital expenditure. Combined CAPEX spend of AI hyperscalers’ (Amazon, Google, Meta, Microsoft and Oracle) this year is approaching $800 billion in aggregate planned investment, or 40% of revenue, which will surpass that of the oil industry during the shale boom in the 2010s and the telecoms industry during the dotcom bubble in the 1990s (source: https://www.economist.com/business/2026/05/13/big-tech-is-sacrificing-its-cashflows-to-prop-up-the-ai-boom).

We are in uncharted territory, and it very much feels like a bubble. Current valuations across semiconductor, memory and semiconductor equipment companies have expanded sharply, despite exceptionally strong earnings growth. We maintain our defensive stance. However, we could easily be wrong because AI productivity benefits are real, the demand is increasing exponentially, and big tech firms are generating plenty of cash with relatively low, albeit gradually increasing, debt levels.

Overall, we are underperforming this year given our ultra-defensive stance.

Best theme YTD:

AI, Quantum and Data:

The theme is driven by the hyperscalers’ spend on datacentres. Some semiconductors and semicap equipment stocks have retuned >50% YTD, and memory stocks’ are in triple digits given the widely acknowledged shortages. More recently the rally has recently reversed with double-digit falls in stock prices in July.

Infrastructure:

Energy and digital infrastructure delivered double-digit returns. Energy infrastructure performance has largely reflected changing expectations surrounding tensions in Iran. We have written specifically on this topic [https://welrex.com/war-and-peace/] and have taken some money off the energy sector earlier in the year. Digital infrastructure, similarly to the AI theme, is driven by the hyperscalers’ spend. More recently we have seen some stock corrections in the IT infrastructure.

Security and safety:

Broadly the theme has benefited from cybersecurity concerns, as many companies are feeling vulnerable to sophisticated attacks with the help of AI agents. We were focusing more on the defence sector, which has underperformed this year. We have recently taken profits from the European defence companies, which have done phenomenally well over the last two years.

Fintech:

Fintech is one theme which has underperformed for most this year as cryptocurrencies such as Bitcoin and Ethereum are down 27-38%. Interestingly, both bounced back 9-18% since early July when AI-related themes started to underperform. This demonstrates the continued diversification benefits in the midst of rising cross-asset correlations.

Gold and Inflation:

Gold has not had a good year so far, contrary to our expectation. As the war in Iran has flared, gold did not provide the hedge as the stock market crashed. In fact, the opposite happened with stock market roaring ahead and gold down YTD. We have earlier noticed this unusual behaviour and suggested that it was related to profit taking after gold’s incredible multi-year run. Our Inflation Buster portfolio which relies heavily on gold has consequently underperformed.

Emerging markets

Most gains in the 1H 2026 are due to chip making, and specifically memory in Korea and TSMC in Taiwan. Like other AI-related themes, EM has sold off since the beginning of July. Instead, we have a significant exposure to Brazil, which has delivered weaker, but still double-digit returns.

Multi-asset strategy portfolio 

Our multi-asset strategy portfolio has underperformed and is down 0.2% in 2026 YTD, which is not a great result considering equities are up around 11% and bonds only slightly negative. This is not surprising given our ultra-defensive stance with the preference for gold and CHF, both of which have declined by single-digit percentages.

Our equities selection is up 3%, because we have a big exposure to Europe, which has underperformed US, and not enough in emerging markets which have outperformed. We also had a negative contribution from commodities, as everything we hold – gold, uranium and crypto have declined. On the bright side the value of our venture capital holdings has gone up significantly, somewhat offsetting this.

Changes to the portfolio

We have slightly reduced our gold exposure and instead increased allocation to US and Emerging Market equities and UK corporate bonds. We have taken some profits from the Energy and Defence sub-themes earlier in the year, and increased exposure to Tech, Consumer Brands, and multi-asset High Income, BRICs and European portfolios, while reducing Inflation Buster and Safety & Security themes.

Expectations for 2H

The second half could prove to be the mirror image of the first. We do not believe in further upside in tech hardware and semiconductor equities where following gains of more than 50%, valuations now appear to discount a very optimistic scenario. Nor in further upside in defence and energy themes, where we feel sentiment has long since peaked.

European equities could take over the lead again, driven by more defensive sectors which were left behind, such as healthcare and consumer, where European companies are strong. Cryptocurrencies could also recover following their recent correction as it has previously done after deep sell offs. Gold should stabilise as profit taking is mostly done and the structural demand drivers are still intact; and we still like our CHF exposure in line with our broad defensive stance.

While near-term market leadership may have been taken over by the AI-related themes, we continue to believe that disciplined diversification, valuation awareness and active risk management remain the most reliable drivers of long-term investment returns. Our portfolios remain positioned accordingly.