EdenTree’s mid-year investment outlook brings together our latest thinking across equities, fixed income and green infrastructure, reflecting our commitment to sustainable investing and long-term value creation.
We remain firm in our belief that investing for positive outcomes – for both people and planet – is not only our responsibility, but also a source of enduring opportunity.
Throughout our mid-year outlooks, we aim to offer clear insights grounded in fundamental research and our sustainable, long-term approach.
We hope you find the views of our sustainable investment experts a valuable guide for the remainder of the year ahead.
- Charlie Thomas, CIO: Are we at the start of a new innovation supercycle?
- David Osfield, Global Equities: Inflation dynamics shift as AI investment accelerates
- Chris Hiorns, European Equities: Easing tensions, but recovery remains fragile
- Greg Herbert, UK Equities: Short-term disruption hasn’t changed our approach
- David Katimbo-Mugwanya, Fixed Income: Energy, geopolitics and the evolving rate outlook
- Tommy Kristoffersen, Green Infrastructure: Green infrastructure recovery gains momentum
- Innovation remains core to sustainable investing: capturing its potential requires discipline and careful distinction between long-term opportunities and hype-driven “moonshot” ideas
- A new innovation supercycle may be emerging: driven by energy security, artificial intelligence and the rebuilding of industrial, digital and energy systems
- The opportunity is compelling but selectivity is critical: the strongest investments will combine proven technologies, resilient business models and the ability to deliver consistent returns through cycles
Innovation: discerning between opportunity and illusion
Innovation has long been at the heart of sustainable investment: disrupting old industries and creating new systems in the search for long-term solutions to environmental and social challenges.
It is also an exciting narrative. A certain part of us all wants to believe that one groundbreaking technology might be the solution to all the world’s problems, and if we can just identify that new technology at an early stage, the opportunity could be boundless.
But public markets are not always well-suited to moonshot investing. While the excitement around breakthrough technologies can be compelling, the accompanying risk-adjusted returns can be significantly less attractive. Separating the hype from the reality can be challenging. But when done properly, investment in innovation can drive lasting change and significant opportunity.
Selecting companies that can endure change
Looking ahead, I believe we could well be in the early stages of a new innovation supercycle. The pressing need for energy security and the rapid development of artificial intelligence, with the accompanying infrastructure demand, are creating a new wave of investment opportunities, as industrial, digital and energy systems are rebuilt for an energy-hungry but climate-exposed world.
Over the course of my career, I’ve seen a wealth of new innovation-focused technologies that promise the earth (or the salvation of it) but these often disappoint investor expectations. This does not mean that as investors we should avoid innovation, but it does call for a disciplined approach. Not every exciting new technology is a good investment, and not every good investment is exciting.
The question for investors cannot simply be whether a company is exposed to a powerful theme, it must be whether it can stand up to the pace of change around it.
Evolving opportunities: AI, climate and infrastructure
Against a turbulent geopolitical backdrop, energy security and supply chain control are of vital importance. At the same time, the climate investment case is evolving. In a world moving closer to a 2°C pathway than 1.5°C, climate adaptation themes, in particular water infrastructure, cooling technologies and grid resilience, are set to be a significant driving force behind the next investment cycle.
The rapid growth of artificial intelligence adds another layer of complexity to this scenario, significantly impacting demand patterns in power, water and infrastructure. At EdenTree, we recognise sustainable investors cannot ignore AI. Of course, it does bring sustainability risks that need to be carefully addressed, but we believe there are opportunities to invest in the companies enabling sustainable growth to happen more efficiently, particularly in areas such as energy use, water resource management, cooling and grid infrastructure.
As we move through the second half of the year, we see significant opportunity in the next phase of this innovation supercycle, but also a real need for discipline and selectivity. In our view, the winners of this next phase will be companies with resilient business models, proven technologies, strong management teams and the ability to generate returns throughout the cycle, whatever new developments it may bring.
- Path of inflation is set to drive markets in H2: the inflationary pass-through from oil-related supply disruptions has been fairly muted; however, AI investment is emerging as a persistent source of inflation in the second half of the year
- AI-driven growth is reshaping the macro environment: sustained investment, pricing power and an unprecedented IPO pipeline are supporting AI-driven growth, but are also adding valuation pressure and increasing monetary policy uncertainty
- The policy backdrop remains complex, reinforcing our valuation-led portfolio approach: the Fund continues to be a valuation-sensitive strategy, with its diversified portfolio construction helping it to navigate market drawdowns
Path of inflation is set to drive markets, but where does the pressure really lie?
From a macro perspective, the path of inflation is likely to be the dominant driver of market performance in H2. Following the US-Iran agreement of no further fighting in Iran, oil prices have retraced over $44 a barrel (c.38%) from their March peak, giving back most of their conflict induced spike1. Despite the severe disruption to shipping routes and molecule cargo flows, the inflationary pass-through has been more muted than anticipated.
Overall, recent commodity-driven inflation has been primarily a supply-side phenomenon, where monetary policy has limited influence. Of greater concern for central banks would be any visible second order effects, and if some demand-side pressures may be underestimated. For example, the ongoing AI infrastructure build-out is creating meaningful crowding-out effects across capex-intensive sectors such as construction, industrials and the broader energy complex.
AI-led growth, pricing power and monetary policy
Looking ahead, the second half will likely see the remainder of an unprecedented IPO pipeline come to market, namely Anthropic and potentially OpenAI, adding to the record breaking $85.7bn SpaceX raise2. This introduces an additional element of supply risk at a time when concerns around valuation within the AI theme are already elevated. More broadly, we would note that markets have effectively repriced several years of expected future growth in a relatively short period. This rapid reappraisal has supported strong performance but also raises the bar for future expectations, with significant growth already reflected in valuations. As a result, the scope for positive surprises may be more limited, and pockets of overvaluation could prove susceptible to periods of selling pressure.
In the US, AI investment has already made a meaningful contribution to GDP growth, with multiplier effects increasingly evident in key data centre corridors. Anecdotal evidence from a recent Midwest conference highlighted companies implementing their second or third price increases this year, encountering minimal resistance within the AI ecosystem. The extent to which these dynamics spill over into the broader economy remains uncertain; however, they underscore the complexity of the monetary policy backdrop, particularly given the bifurcated nature of growth between AI-related and non-AI sectors.
Implications for the Fed
With new leadership at the Federal Reserve, Chairman Warsh’s initial communication has been absolutely clear in establishing that policy will not be asymmetrically biased from the outset. Should inflation continue to exceed already elevated expectations, this could have quickly evolved into a credibility challenge. Going forward, any concerns the market may have had regarding a willingness to tolerate higher inflation looks misplaced, with 1.5 hikes now expected by the end of H23.
Given the scale of committed capex by hyperscalers ($1trillion in 2027)4 and the apparent lack of rate sensitivity, it is difficult to envisage a meaningful easing cycle without a clear deceleration in investment activity. While this would likely require a more pronounced deterioration in labour market conditions, such weakness has yet to materialise. It’s worth noting that there are only three more Fed meetings before the 3 November mid-term elections, the outcome of which could materially restrict the fiscal policy backdrop in the event of a divided Congress.
Portfolio positioning: maintain valuation discipline (SARP)
With the EdenTree Sustainable Global Equity Fund’s strong valuation discipline (through our “Sustainability at a Reasonable Price” process), we’ve been actively taking profits in a number of exceptional performing holdings. The net result is the Fund is currently underweight Information Technology, while assessing better valued opportunities.
A more diversified portfolio construction helps navigate and mitigate the sharper drawdowns seen in some areas of the market. The Fund continues to be a core, valuation-sensitive strategy rather than a portfolio that majors heavily on one single theme, remaining actively positioned to avoid any excessive exposure to any one style or market factor.
- Bloomberg, Brent Crude, 24.06.2026, based on 1-month forward generic contract.
- Includes the Greenshoe overallotment
- Bloomberg, based on the Fed Funds Futures, 24.06.2026.
- Moody’s raises hyperscaler capex forecast to $1tn by 2027
- Our outlook for H2 remains finely balanced: the easing of geopolitical conflict could support growth, but the economic backdrop remains weak, and recent shocks may take time to unwind
- The Fund remains defensively positioned: we have reduced exposure to cyclicals and increased exposure to resilient, cash-generative businesses
- Market dislocations are creating selective opportunities: we are finding value in companies that we believe have been sold off too aggressively, both with regards to fears around AI and the weak macroeconomic environment
Improving sentiment, but growth remains weak
Looking into the second half of the year, the outlook for European equities remains finely balanced. While there have been signs of improvement, notably the apparent easing of tensions between the US and Iran and a cooling in US trade policy, the global economy is still absorbing the damage. The closure of the Strait of Hormuz and previously elevated oil prices have weighed on activity, and although energy costs have now fallen, their impact on growth and corporate margins is likely to persist in the near term. As a result, the economic outlook for Europe, and globally, remains subdued, with a softer Q2 earnings season anticipated.
Maintaining a defensive stance
Against this backdrop, we believe it remains appropriate to stay defensively positioned. We continue to reduce exposure to areas that have performed strongly, including banks, and have been re-allocating capital towards more resilient parts of the market such as healthcare and food retail. These businesses offer more dependable cashflows and greater visibility should macroeconomic conditions remain challenging.
Market dislocations reveal AI opportunities
At the same time, the portfolio continues to be actively managed to capture opportunities created by market dislocations. A clear dynamic in today’s market is the widening gap between highly valued AI beneficiaries and companies that are being priced as potential AI losers. We are not inclined to chase fashionable names trading on demanding multiples, but we do see opportunity in companies where we believe fears around disruption have gone too far. This has included initiating positions in Wolters Kluwer and adding to holdings such as Randstad.
Prioritising resilience and flexibility
Overall, while the geopolitical backdrop has shown tentative signs of improvement, uncertainty remains elevated. The portfolio is therefore positioned with the aim to provide resilience in a weaker economic environment, while retaining the flexibility to benefit should conditions stabilise more quickly than expected. A disciplined, valuation-aware approach remains key.
- Early momentum for UK equities has faded: A more supportive backdrop briefly supported UK equities before geopolitical tensions and policy uncertainty reversed sentiment.
- Structural challenges remain, with glacial policy delivery and limited scope for fiscal expansion given the scrutiny of the bond market.
- Valuation and discipline still underpin our investment approach: UK equities continue to offer value despite the uncertainty; our focus remains on high-quality, globally oriented businesses.
A false dawn for UK equities
At the end of last year, our cautious forecast for 2026 was that things just needed to get a bit less bad for UK equities to perform well. The bleak alternative to that was more of the same: poor delivery of government policy, sticky inflation and uncomfortably high interest rates.
Until 28th February, some of our hopeful prognosis was coming to pass: UK GDP growth was pretty decent in the first quarter; inflation was edging lower and closer to the Bank of England’s 2% target; and interest rates were also trending lower. The UK stock market was up by more than those in Europe and the US.
However, that progress proved short-lived. Events intervened, as they often do, with geopolitical tensions rising sharply as the US embarked on its ill-considered war in Iran. Higher rates, higher inflation and squeezed UK consumers were a headwind for many UK stocks. Oil and defence stocks did quite well, but anything domestic was hit hard.
With a change in prime minister now underway, there is likely more policy uncertainty to come, meaning the bleak alternative remains firmly in play.
Structural constraints remain
Two structural constraints remain for the UK: policy implementation is glacial and the bond market will remain the impassive judge it has always been. There are few hiding places. Any new government will face exactly the same fiscal constraints as the last government and any new fiscal largesse will be judged harshly. Improving the productivity and growth of the UK economy will require years of work and will need policy clarity and political skill, at a time when attention spans are very short. It’s a tall order.
What does this mean for UK equities?
From the perspective of the equity market, some nuance is necessary.
Firstly, we would reiterate that much of the FTSE 100’s profits come from abroad, whether from energy, mining, consumer goods or business services. There are many global factors that influence these sectors that have nothing to do with UK politics. War is one, another is AI.
Secondly, valuations in the UK more than reflect the current malaise. You can buy healthy, growing businesses on low valuations in the UK, often dramatically so compared to similar businesses in the US. UK-listed businesses are being frequently acquired at knock-down valuations relative to just five years ago. Trade buyers of these companies clearly see that value.
The government of the UK can clearly influence asset prices, but one should not overstate this, barring a full-blown fiscal crisis. This looks unlikely with the bond market hovering over any new prime minister.
Our investment approach is unchanged
Our view as equity investors has not changed. As stock pickers, we buy individual stocks on their individual merits in terms of valuation, sustainability and business quality. Politics might intrude, but we are looking for businesses where we can take a long-term view and broadly diversify our holdings so that we do not concentrate risk around things we cannot control. We do have some domestic exposure, in what we consider to be attractively valued stocks relative to their history, but the bulk of our holdings are in more global businesses, typically leaders in their niches. The current situation, in our view, is a distraction but does not change our long-term approach.
- Geopolitics is continuing to drive bond markets: energy prices are increasingly influencing inflation expectations, rate outlooks and bond yields
- The interest rates outlook is diverging by region: the ECB is likely to raise interest rates further this year, with the Fed likely to take similar action as the BOE remains cautious
- Selective positioning remains key: attractive yields support carry, with a bias to higher-quality credit, shorter duration and defensive exposures
Geopolitics and the energy outlook continue to drive bond markets
Geopolitics is set to remain the defining force for bond markets in the second half of 2026. Despite the apparent easing of tensions between the US and Iran, the continued uncertainty around the conflict in the Middle East and the definitiveness of its resolution is feeding through to bond yields via the perceived effect of energy prices on inflation – a key determinant of monetary policy. Bond markets now appear more correlated with shifts in the costs of energy, meaning sustained moves in oil prices are influencing near-term rate expectations.
A nuanced inflation backdrop
While the broader macroeconomic impact appears contained so far, market participants are nonetheless assessing the potential lasting effects of the conflict. Higher energy costs are beginning to erode household purchasing power and consumer confidence, in turn dampening consumption. This is a more nuanced inflation backdrop than in 2022, when strong demand amplified widespread post-pandemic supply constraints; alongside recent supply disruption, demand destruction from higher energy prices may well curb inflation pressures.
Diverging central bank paths
Central bank policy is, therefore, becoming increasingly differentiated by region. Commencing from a neutral policy setting, the European Central Bank has recently hiked rates and is likely to hike further in the latter half of the year. The US Federal Reserve also now appears likely to raise rates to keep consumer prices in check despite being supported by relative energy independence and resilient growth, with AI-driven productivity gains and robust corporate earnings that indicate economic durability. We expect the Bank of England to move more cautiously, if at all, from its current tight stance.
Selective positioning in a higher yield environment
For fixed income investors, a more selective and yet nimble approach is warranted. Yields remain attractive, based on the higher rates component as yield curves flattened following the onset of the US-Iran war, particularly at the short end. Longer-dated debt faces a more complex set of risks, ranging from ongoing fiscal expansion to renewed inflation risks.
In the absence of a significant slowdown in economic activity, we see limited catalysts for a material widening in credit risk premia. Economic growth remains supportive, with a favourable refinancing backdrop for corporates that shows little evidence of rising default risk in public credit. We continue to see carry as the likely dominant driver of returns for the year.
Across portfolios, we maintain a bias towards higher credit quality and have also strategically increased exposure to floating-rate instruments and cash as a defensive ballast. Relative duration is closer to neutral, albeit favouring shorter-dated maturity tenors. Our disciplined exposure to high-quality carry remains appropriate for the remainder of the year.
- Recovery remains on track: We believe the key drivers supporting a second-half recovery are intact, underpinned by long-term structural demand for green infrastructure linked to the energy transition.
- Attractive valuation opportunity: Listed green infrastructure continues to offer inflation-linked income and growth potential, with scope for further rerating following a prolonged period of weak sentiment.
- New demand catalyst emerging: The rapid buildout of AI infrastructure is reinforcing long-term power demand, strengthening the strategic role of renewable generation and storage within the energy mix.
A supportive backdrop for recovery
After a strong start to the year, we believe the factors remain in place for a continued recovery in the second half of the year, and we believe the central long-term thesis of the Fund remains intact: green infrastructure investments remain underpinned by an energy transition that requires vast long-term investment.
Listed green infrastructure continues to offer an attractive combination of tangible assets, inflation-linked income and structural growth. Recent Fund performance has been encouraging, but we do not yet see any reason to rotate out of existing holdings, as we believe further rerating is warranted from here.
AI infrastructure drives a new wave of power demand
Looking ahead, the rapid buildout of AI infrastructure is emerging as a key market driver. Interest rates and asset valuations still matter; geopolitics and energy prices still matter; but AI is a force capable of changing the shape of long-term power demand. Data centres require a large, reliable, clean supply of electricity. Speed of deployment is also vital. Gas turbine manufacturing supply chains are straining under the demand for new gas generation, and lead times are becoming longer. So, for hyperscalers with net zero commitments, renewable energy generation, combined with battery energy storage, is increasingly becoming a strategic necessity.
We believe that our largest holding, Greencoat Renewables, is well positioned given its exposure to markets where data centre demand and corporate power purchase agreements are already important features of the electricity market. We have explored opportunities offering more direct AI infrastructure exposure but remain disciplined on valuation and portfolio characteristics; we concluded many of the potential investments we considered operate with technology that is not yet sufficiently proven, not yet generating secure income streams, or are priced for a consensus growth story that leaves an insufficient margin of safety for investors.
Staying disciplined as opportunities evolve
Our priority for the second half is to remain disciplined, allowing existing holdings to recover while retaining flexibility to add quality assets at reasonable valuations. Where public market discounts to the value of underlying assets remains stubbornly wide, we continue to see private market buyers stepping in to acquire assets or entire companies, seeking to capture the valuation disconnect over time. With all of the above in mind, our ambition is to continue to generate a positive environmental impact from our holdings while capturing the financial upside from what seems to be not just a durable – but an improving – clean energy demand tailwind.
Important Information
Marketing Communication | For professional clients only.
The views presented are as of the date published. They are for information purposes only and should not be used or construed as investment advice or recommendation to buy or sell any investment. References to specific stocks are for illustrative purposes only and do not represent a recommendation to buy or sell any securities. The holdings referenced are part of a broader, diversified portfolio and do not represent the full portfolio. No forecasts can be guaranteed and there is no guarantee that the information supplied is complete or timely, nor are there any warranties with regard to the results obtained from its use. Edentree is the source of data unless otherwise indicated. Capital at risk. The value of an investment and the income from it may go down as well as up and the investor may not get back the amount initially invested. Past performance is not necessarily a guide to future returns. Selecting stocks due to our ethical criteria means that the choice of stocks is limited to a subset of the stock market and this could lead to greater volatility.