Investment Weekly: a cruel summer?
3 August 2026
Key takeaways
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The Federal Reserve kept interest rates unchanged at its July meeting, as widely expected. Attention now shifts to September, with markets pricing in a two-thirds chance of a hike.
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Recent volatility in global semiconductor names has been striking. Investors remain focused on the durability of huge capex spending by US hyperscalers, while concerns are also emerging that the semiconductor industry may overinvest in capacity.
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There is increasing evidence that the days of emerging markets being treated as a monolithic lump are over. The market fallout from the unexpected resignation of Bank Indonesia Governor Perry Warjiyo, and the South African Reserve Bank‘s surprise decision to leave interest rates unchanged, was largely confined to their respective markets.
Chart of the week – a cruel summer?
Will it be another “cruel summer” for investors as we head into August? Summer is supposed to be a time to unwind. But for investors, recent summers have often brought the opposite — volatility spikes. The catalysts have varied: Fed surprises, bond market moves, a stronger yen, and growth concerns. And while markets have ultimately climbed the wall of worry, volatility can still test investor discipline and encourage bad decisions. One useful exercise is a market “pre-mortem”: what could go wrong, and how prepared are we? Three themes stand out.
First, stock market concentration. Concerns around tech spending, profit margins, or competition from lower-cost AI models could trigger further market wobbles.
Second, inflation and interest rates. We’ve had some better inflation data, but central banks remain alert to supply shocks – so interest rates remain a key driver of markets.
Third, geopolitics. Markets have taken higher commodity volatility in their stride so far, but further uncertainty — especially with strategic reserves and inventories depleted — could be harder to navigate.
Of course, maybe none of these risks ultimately materialise. But, preparation beats prediction. And the best defence is portfolio resilience: diversify the diversifiers, stay focused on the long term, and don’t let short-term volatility drive long-term thinking. If you can do that, you can enjoy the summer without constantly checking the markets.
Market Spotlight
Behind closed doors
Public markets have seen tremendous gains on the back of the generative AI boom, largely driven by the infrastructure providers and chipmakers enabling the technology. While this is a sensible way to gain exposure, one trade-off is that public investors are mostly making indirect plays – so, it's important to assess where the most significant value creation is actually happening.
Current market dynamics suggest that the frontier of AI innovation is choosing to stay private. Unlike previous tech cycles, today's high-growth leaders often wait 8-10 years before an IPO. Because companies are staying private for longer, much of their steep growth curve and value accretion occurs well before they hit public exchanges. That can leave public-only portfolios meaningfully under-exposed to the sector’s most lucrative phase.
The impact of this shift is that the most advanced breakthrough applications – developed by the likes of OpenAI, Anthropic, and Databricks – are not available on stock exchanges. While public markets build the underlying infrastructure, true value creation and generational innovation often happens pre-IPO.
Overall, public equities are critical to the AI ecosystem, but investors may consider adding private market exposure to capture the most transformative models and potential for outsized returns.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. The level of yield is not guaranteed and may rise or fall in the future. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management, Factset, Bloomberg, Macrobond. Data as at 7.30am UK time 31 July 2026.
Lens on…
Should I stay or should I go?
The Federal Reserve kept interest rates unchanged at its July meeting, as widely expected. Attention now shifts to September, with markets pricing in a two-thirds chance of a hike. With Chair Warsh unwilling to manage policy expectations and reiterating that the Fed is data dependent, upcoming macro releases take on added importance and could increase market volatility. Following a strong spring, payroll growth has moderated, while household sentiment suggests a softer labour market than the headline 4.2% unemployment rate implies. Any further cooling over the summer could prompt investors to reassess whether a September hike should be pushed back. Inflation data will be equally pivotal: a second consecutive subdued core CPI reading would cast doubt on whether broad-based price pressures are taking hold, particularly as labour cost growth appears contained and the housing market remains subdued. |
The decision could go to the wire, with further CPI and payrolls releases landing shortly before the meeting. Unpredictable developments in the Middle East may also influence the outlook. Even if the Chair favoured using it, forward guidance could be a hostage to fortune at this point.
China’s chip challenge
Recent volatility in global semiconductor names has been striking, reflecting deep uncertainty over the future of the AI boom. Investors remain focused on the durability of huge capex spending by US hyperscalers, while concerns are also emerging that the semiconductor industry may overinvest in capacity. After all, this is a sector historically known for its highly cyclical boom-bust dynamic. While champions in South Korea, Taiwan and Japan still dominate the global semiconductor industry, mainland Chinese players have quietly gained market share through rapid capacity expansion, a narrowing technology gap and strong growth in domestic demand. Meanwhile, the “soft” tech story is gathering pace. Moonshot’s Kimi-K3, is being touted as a top performer – and, importantly, it’s cheaper to run. |
The moat around US tech and established Asian hardware names remains centred on providing cutting edge technology within an entrenched Western ecosystem. However, recent developments in mainland China are a reminder that while “good enough”, lower cost capabilities could challenge global AI business models, they can also provide opportunities for investors looking to access the AI theme at discounted valuations.
Contain yourself
There is increasing evidence that the days of emerging markets being treated as a monolithic lump are over. The market fallout from the unexpected resignation of Bank Indonesia Governor Perry Warjiyo, and the South African Reserve Bank‘s surprise decision to leave interest rates unchanged, was largely confined to their respective markets. |
The absence of broader contagion is particularly striking given the wider backdrop. Oil prices have moved higher again, markets are pricing in Federal Reserve rate hikes, and the dollar is trending higher — conditions that would once have weighed heavily on emerging market local debt. But the broad asset class has been resilient, with meaningful dispersion in country-level performance in 2026 suggesting that investors are becoming more discerning. They are judging individual countries on the strength of their domestic fundamentals and specific vulnerabilities and opportunities. That growing differentiation points to a meaningful regime shift, and one where a broad EM allocation in portfolios can provide significant diversification benefits.
Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg, Refinitiv, FactSet. Data as at 7.30am UK time 31 July 2026.
Key Events and Data Releases
Last week
This week
For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management. Data as at 7.30am UK time 31 July 2026.
Market review
Global equity markets rose on lower oil prices as investors digested mixed Q2 tech earnings. In Asia, the Shanghai Composite, the Hang Seng and the Sensex increased. Continued AI-related valuation concerns weighed on the Kospi index in volatile trading. The Nikkei 225 index was little changed. US equities were mixed. The Nasdaq index increased though the Philadelphia Semiconductor index fell further. The S&P 500 moved sideways. European bourses saw broad-based gains, with the FTSE-100 reaching an all-time high. In rates, Fed Chair Warsh’s lack of transparency on monetary policy lifted 30yr US Treasury yields and bear steepened the curve. The FOMC voted 9-3 for unchanged rates with hawkish dissents from Hammack, Kashkari and Logan. In FX, the US dollar lost ground against major peers, particularly the yen. Gold rose.
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