Winter may be approaching, but financial markets are heating up. Borrowing costs are rising, as inflationary pressures mount. Geopolitical tensions are reaching boiling point, and the AI giants are warning that their technology could be about to, at best, take our jobs, and at worst, kill us off. Stock markets have breezily dismissed these problems, but many investors may find themselves with a queasy feeling that this calm won’t last indefinitely.
It’s a head-scratching moment. Investors may not want to ship out from stock markets altogether. After all, AI still appears to be motoring and ‘bubbles’ can often last far longer than people think. Former Federal Reserve chair Alan Greenspan was worrying about ‘irrational exuberance’ in 1996, yet the technology bubble didn’t burst until 2000*. The AI trade may have room to run.
The solution is to try and introduce a bit of protection – some non-AI exposed areas that can protect your portfolio through any volatility. Some of the usual options have become more problematic. For example, investors can get a fabulous income on government bonds (5%+ and rising), but the volatility and uncertainty may be a little too much for safety-first investors.
Gold has also proved vulnerable to higher borrowing costs – it doesn’t pay an income, so there is a larger opportunity cost when investors can get high rates on cash. Although, the gold price has been slipping in recent weeks.
Here are some areas you might consider to provide some portfolio protection in testy moments for global stock markets.
Global equity income
Income funds can be a real source of balance in a portfolio. Investors have the reassurance of a regular dividend, which can be a powerful incentive to stay invested during periods of market volatility. Also, income funds have a natural valuation discipline. If the share price rises too high, a stock’s yield will automatically drop – yield is expressed as a percentage of the share price – and it therefore falls off the radar for many income funds. This means technology and other high valuation areas don’t tend to be as large a weight in income funds. They can therefore be a natural ballast to technology-heavy growth funds.
The Fidelity Global Dividend fund holds around 11% in technology. That compares to around 30% in the MSCI World index**. It is also relatively lowly-weighted to the US – it holds just 24% in the US market, compared to 72% of the index**. While semiconductor group TSMC is the fund’s largest holding, the remainder of the top 10 holdings are companies such as Roche, Deutsche Boerse, National Grid, Unilever and CME Group**. As a result, the fund has tended to do well at times when the dominant AI trade has wobbled.
The UK
One of the oft-cited downsides of the UK market has been its lack of exposure to technology stocks. The FTSE All Share has just 2.6% in the technology sector***, with many of the UK’s innovative start-ups shipping off to the US to raise capital. This may be bad for the UK economy, but it means that the UK stock market offers valuable diversification from the AI trade.
The Jupiter UK Dynamic Equity fund offers another layer of protection by looking for companies that are subject to ‘business transformation’. In other words, their destiny is in their own hands. Manager Alex Savvides takes a “focused, engaged, active ownership approach”, working with companies to help them realise their potential and overcome difficulties.
He starts by looking for uncertainty: “We focus on underperforming companies. Event breakdowns, strategic missteps and evidence of behavioural biases affecting share prices negatively. Secondly, on valuations we look for low points. We look for (valuations) at the low points of historic ranges, but dividend yields and cash flow at higher ends.”
The result has been consistent strong performance – more than double the level of the wider UK All Companies sector over five years****. The fund delivered a positive return every calendar year from 2021 to 2025, and for the year to date in 2026^. That has happened whatever has been happening in wider stock markets. It also has a yield of 2.6%**, which provides some cushion against volatility.
Emerging market bonds
Developed market government bonds have failed to deliver on their ‘safe as houses’ reputation since the start of this year. Vast government debt piles, erratic policymaking and inflationary pressures from the war in Iran have created significant volatility in government bond markets. The average fund in the IA Global Mixed Bond sector is down 1.3% for the year to date^ and has offered little protection against market volatility.
By contrast, emerging market bonds have been relatively defensive. The average fund in the IA Global EM Bond Blended sector is up 1.6% for the year to date^. Increasingly, emerging markets look fiscally responsible, while developed markets look free-wheeling, high-spending and imprudent. M&G Emerging Markets Bond fund manager Charles de Quinsonas says there has been “a transformation in emerging market credibility, both in terms of monetary and fiscal policy.”
“We have seen this demonstrated throughout the most recent economic cycle where emerging markets are no longer just reactive to US monetary policy but have moved independently. Central banks in emerging markets acted effectively in the wake of the COVID-induced inflationary bout to mitigate the impact of runaway inflation. The evolution of emerging policy credibility is one of the most under-appreciated shifts in global fixed income.”
Yet investors are still rewarded for taking the risk. Emerging market debt funds have yields of up to 8-9%. The M&G fund has a yield of 8%**. Nervous investors are paid well to sit through any volatility.
It may or may not be the end of the AI trade. There are strong views on both sides. However, investors can ensure that they don’t feel every bump in the road. There are funds that have shown that they can zig when the rest of the market is zagging and they have an important place in a portfolio as tensions mount.
