Welcome to your Quarterly Investment Report for Q3 2026

In the third quarter of 2026, higher energy prices and conflict in the Middle East raised concerns about inflation, which pushed up bond yields. Even so, the global economy held up well, company profits were strong and share prices in developed markets kept rising.

With oil and gas prices rising, returns came from more areas than AI alone. In ProsperityShield, investments in commodities (raw materials such as oil, gas and metals) added strongly to returns. In ProsperityBuild, shares in energy companies also performed well. However, semiconductor companies, which make computer chips, held back returns after a sharp fall in South Korean chipmakers' share prices.

Bond yields rose and central banks kept interest rates high, but a strong economy kept share prices moving up. ProsperityBuild's investments in bank shares did well, as higher interest rates can increase bank profits. In ProsperityShield, high-quality government bonds fell in value as yields rose (when yields rise, the price of existing bonds falls). Corporate bonds (loans to companies) held up better, supported by financially healthy companies and the higher income these bonds now pay.

We remain cautious about some AI-related investments, where high expectations could lead to disappointment. We also think bond yields could stay higher than many investors expect. We continue to spread investments across different areas and avoid those where prices look too high.

The third quarter of the year brought two opposing forces: rising inflation and a strong economy. Inflation pressure returned, as higher energy prices and geopolitical uncertainty raised expectations for inflation and pushed up bond yields. Central banks responded by keeping interest rates high.

At the same time, the global economy proved stronger than many expected. Company earnings were robust, and shares in developed markets continued to climb. Returns also came from a wider range of areas. AI-related shares still mattered, but shares in energy and financial companies, commodities (raw materials such as oil, gas and metals) and value stocks (shares that look inexpensive compared with company profits) played a bigger part.

For several years, AI has led markets, with chipmakers among the biggest winners. This quarter, investors started looking further afield. Renewed conflict in the Middle East disrupted energy supplies, sending oil and gas prices sharply higher. Shares in energy companies rose, as did commodity prices. Industrial metals and farm products also rose in price on weather and supply worries.

Our funds reflected this shift. In ProsperityShield, investments in commodities were a strong source of returns, showing how real assets (physical things such as energy and metals) can help when inflation rises.

In ProsperityBuild, investments in energy company shares performed well, supported by higher oil prices, strong profits and share prices that looked good value. Investments in semiconductor companies, which make computer chips, held back returns. Shares in South Korean chipmakers fell sharply after a very strong first half, which appeared to reflect investor questions about whether AI spending can continue at this pace and renewed worries about Chinese competition.

This does not mean the AI story is over. It shows how quickly market leaders can change, and why holding a broad mix of industries and investment themes matters.

The quarter combined higher inflation and rising interest rates with surprisingly strong economic activity and company profits. Higher energy costs fed inflation concerns, keeping central banks cautious and pushing government bond yields higher.

Shares coped well. Investors focused on healthy growth and strong earnings rather than higher rates alone. ProsperityBuild's investments in bank shares benefited. Higher interest rates can lift bank profits, and steady economic activity eased fears about the cost of borrowing for businesses and households.
ProsperityShield had a different experience. High-quality government bonds fell in value as yields rose, a reminder that even the safest bonds can lose money when rates climb. Corporate bonds (loans to companies) held up better. Companies remained in good financial shape, and the extra income these bonds now pay helped offset losses on government bonds.

Higher interest rates hurt government bonds, but a growing economy still supported share prices, bank shares and corporate bonds. For a diversified portfolio, knowing which investments are holding up matters as much as knowing which way interest rates move.

Outlook

We remain cautious about some investments linked to the rapid growth of AI. High expectations and ongoing heavy spending leave some areas open to disappointment. We also believe bond markets may be underestimating risks. Stubborn inflation, high government borrowing and stronger competition for investors' money could keep yields higher than many expect. With this in mind, we continue to spread investments across different areas and to avoid areas where prices leave little room for error.

Introduction

In the third quarter of 2026, a strong economy met the return of rising prices. Higher energy costs and uncertainty in the Middle East raised expectations for inflation. This pushed up bond yields and led central banks to keep interest rates high.

Despite this, the global economy held up better than expected. Company earnings were strong, and shares in developed markets kept moving higher. Market gains also came from more places. AI remained a key source of returns, but shares in energy and financial companies, commodities (raw materials such as oil, gas and metals) and value stocks (shares priced cheaply compared with company profits) all played a larger role. This meant gains were spread across more parts of global markets.

From chips to commodities: market leadership broadens

In recent years, AI has been the main story in markets. Semiconductor companies, which make the chips that power AI, have been among the biggest winners. In this quarter, that started to change. AI continued to drive investment and company earnings, but rising energy and commodity prices drew investors' attention to other parts of the market.

The renewed conflict in the Middle East was a major trigger. It disrupted energy supplies and pushed oil and gas prices sharply higher. This boosted shares in energy companies and led to strong returns from commodities. Industrial metals and farm products also rose in price on weather and supply worries.
Both of our funds felt the effect of this shift.

In ProsperityShield, holdings in commodities made a strong contribution to performance. This highlights the value of real assets, physical things such as energy and metals, which can help protect a portfolio when inflation picks up.

In ProsperityBuild, investments in energy company shares also added strongly to returns. These companies benefited from higher oil prices, along with strong profits and share prices that looked good value. Investments in semiconductor companies, however, held back performance. The main cause was a sharp sell-off in South Korea. Shares in Korean chipmakers delivered exceptional returns in the first half of the year. In the third quarter they fell, which appeared to reflect investor questions about whether AI-related spending can be sustained and renewed fears about growing Chinese competition.

The lesson is not that the AI theme has run its course. Instead, the quarter showed how quickly the market's leaders can change. Holding a broad spread of industries and investment themes means a portfolio can benefit when opportunities widen beyond recent winners.

Resilient growth defies the return of inflation

The third quarter gave investors an unusual mix. Inflation pressures came back and interest rates rose, yet the economy and company profits stayed remarkably strong. Higher energy prices fuelled concerns about inflation. Central banks responded by keeping interest rates high, and government bond yields climbed.

Share markets coped better than many might have expected. Investors did not focus only on higher interest rates. They also responded to healthy economic activity and strong company earnings.

In ProsperityBuild, our investments in bank shares did particularly well. Higher bond yields and interest rates can increase how much banks earn. At the same time, a steady economy eased worries that higher borrowing costs would hurt businesses and consumers.

In ProsperityShield, higher rates had a very different effect. High-quality government bonds lost value as yields rose, which led to negative returns from this part of the fund. This is an important point about bonds. Even the highest-quality government bonds can fall in value when interest rates and yields go up.

Corporate bonds (loans to companies), also known as credit, told a more positive story. The credit funds held within ProsperityShield performed better, supported by the ongoing strength of companies and the higher income these bonds now offer. Borrowing costs for companies have risen, but their finances generally remain sound. That extra income gave the fund a useful cushion against losses on government bonds.

The quarter showed both sides of higher interest rates. They made life harder for government bonds, while a resilient economy supported share prices, bank shares and corporate bonds. For diversified portfolios, knowing which investments are holding up is just as important as knowing which way interest rates are heading.

Outlook

We remain cautious about some investments linked to the rapid growth of AI. Expectations are high and spending continues at a heavy pace, which leaves parts of the market exposed if results disappoint.

We also believe the risks in bond markets may be underestimated. Stubborn inflation, high levels of government borrowing and more competition for investors' money could keep yields higher than many expect.

With this in mind, we continue to favour diversification. We also aim to avoid investing too heavily in areas where prices leave little room for disappointment.

Investments in energy companies made the largest contribution to returns this quarter, as higher oil prices lifted shares in companies such as BP and Shell. Financial companies made the second-largest contribution, while technology companies also added value. Microsoft made the largest contribution of any single holding, which appeared to reflect growing investor confidence in its ability to make money from AI, while Apple rose after strong results. North America and Japan were the strongest regions.

Some semiconductor (computer chip) holdings held back returns. After strong gains earlier in the year, investors questioned high share prices and whether AI spending can continue at its current pace. Companies selling everyday goods, industrial companies such as manufacturers, and healthcare companies also reduced returns, as did European companies outside the UK.

Leading contributors included Microsoft, Apple, BP, Shell, Nvidia and Meta Platforms.

The quarter was dominated by a sharp fall in government bond prices. Higher energy prices renewed concerns about inflation, and several major central banks raised interest rates. When interest rates rise, the price of existing bonds falls. Holdings in high-quality government bonds, particularly US government bonds, reduced returns the most.

Government bonds from emerging markets also fell where they were issued in US dollars or other major currencies. Those issued in each country's own currency, particularly in Brazil, helped to limit losses.

Corporate bonds (loans to companies) held up better than government bonds but still reduced returns overall. Commodities made the largest positive contribution, helped by rising oil and energy prices and gains in industrial metals. A fund, which aims to provide returns that are less dependant on movements in major markets, also added value.