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In June, global markets navigated a complex web of economic and geopolitical developments, creating a striking paradox: rising trade barriers and the ensuing risk of rising inflation on the one hand, and record-high equity performance on the other. Despite these tensions, recent data reveal a resilience in market sentiment.

We expect the average effective tariff rate on US imports to reach at least 14%, up from just 2% in 2024. Yet, the MSCI World equity index ended the quarter at an all-time high. The market appears to have shrugged off tariff concerns, potential GDP downgrades, and escalating geopolitical tensions in the Middle East. Notably, however, easing US-China tensions and encouraging data on AI adoption have served as supportive tailwinds. Companies benefiting from AI technology have played a significant role in driving the recovery in US equity markets.

While inflation has recently been more subdued than expected, the coming months should be pivotal as the impact of tariffs begins to filter through the economy. We expect upward pressure on inflation over the summer, though the magnitude of this increase remains uncertain. It is worth noting that the US Bloomberg Economics Inflation Surprise Index is in negative territory – its lowest levels since August 2020 (see Figure 1). This comes at a time when commodity prices have begun to trend higher.

In recent months, we have seen significant deleveraging and momentum drawdowns across the hedge fund space, largely driven by crowded positioning. Our team has navigated these events with relatively lower exposure and correlation to such scenarios, which we expect to see more of over the second half of the year, given changes in market structure and hedge fund leverage.

We are also witnessing a gradual reallocation of capital into regions outside the US, with new capital inflows driving relative fundamental dispersion across Asia, Latin America, Europe, and Central and Eastern Europe, Middle East and Africa (CEEMEA). This dynamic macro and trading environment, combined with our ability to reallocate capital quickly, has created compelling opportunities. Additionally, thematic exposures in AI, Energy Transition, Financials and Consumer Discretionary have been particularly supportive for our portfolio, with both established and emerging ideas gaining traction.

As we enter earnings season, we expect short-term factors to influence some of our positioning decisions. However, our primary focus remains on capturing opportunities aligned with FY26 expectations. In some instances, we have found that the market has been overly focused on near-term narratives, pushing valuations, in our view, to attractive levels both on the long and short side.

We believe that our ability to attract and retain talent, offering stability and a platform for multi-year growth, remains a key differentiator for O’Connor. We are seeing growing interest from portfolio managers seeking an alternative to the traditional multi-manager model: one that offers flexibility around risk without being constrained by factors such as Industry Classification Standard (GICS) definitions or fixed coverage lists, and the opportunity to collaborate closely with other senior risk-takers who manage separate books.