Half-time for MPS: rebalancing in a concentrated market

Markets have been contending with competing forces this year, including uncertainty over ceasefire developments, the reopening of the Strait of Hormuz, mixed economic data, and ongoing enthusiasm for AI. Here’s what it means for our MPS portfolios. 

Market backdrop: strong returns, rising concentration, ongoing geopolitical risk 

Despite bouts of volatility, the broader trend has remained supportive of risk assets. More recently, however, diversification has been challenged by the increasing concentration of market leadership.

Companies exposed to the build-out of AI infrastructure, alongside broader beneficiaries of the AI theme, have driven much of the market's performance. This has reversed some of the broader regional and sector participation seen earlier in the year. As a result, global equity markets have become more reliant on a relatively small group of companies, with this trend particularly evident in the strong performance of Korea and Taiwan. 

Over the last month particularly, we’ve seen significant capital-raising activity, with high-profile examples including the SpaceX IPO, and Alphabet’s announcement of an equity raise of around $80bn. The scale of these transactions highlights both the capital intensity of the AI infrastructure buildout and the potential to weigh on the supply-demand dynamics that have supported equity markets in recent years. 

As we reach halfway through the year, investor sentiment has been supported by the recent announcement of an interim agreement between Iran and the US. This has temporarily reopened the Strait of Hormuz and established a new 60-day timetable to address outstanding issues, including Iran's nuclear programme. 

Portfolio positioning: why we reduced equities and added commodities 

While we view this partial de-escalation as a constructive development, we believe the foundations of the agreement remain fragile. Regional tensions remain elevated, and achieving a broader and lasting resolution will likely prove challenging given the various geopolitical interests involved.

While diversification beyond equities might not add to performance over the short term, it remains central to our long-term approach to portfolio construction. 

Following news of the interim agreement, the Brent futures price has fallen well below the peak over the last month of ~$112. In our view, this presented an attractive entry point for a new commodities position. 

We believe it is unlikely that oil prices will return to pre-conflict levels of $60–70 a barrel without retaining some form of geopolitical risk premium. 

Importantly, energy represents only one component of the broader commodity index. Hence why our view is based not only on the current price of oil, but also on the long-term diversification benefits that a broad commodity allocation can provide within a multi-asset portfolio.

To fund this addition, we have reduced the long-held overweight to infrastructure back to neutral. Infrastructure has performed well over time and while the sector breakdown does offer indirect commodity exposure, it also carries interest rate sensitivity. Adding the commodity index fund complements the infrastructure position with a purer exposure to commodity prices.

We have trimmed equity markets that have had outsized performance since the last rebalance. Perhaps unsurprisingly, this has been concentrated in North America and Asia, which have the highest representation of semiconductor and AI-associated companies.

The team cut the MPS range’s infrastructure overweight back to neutral and made modest cuts to certain fixed income holdings.

The recent news has also been accompanied by a rally in bond yields, and commodities offers another source of diversification beyond fixed income.

Strategically, our conviction in commodities is driven by structural tailwinds including geopolitical risk, tariffs and deglobalisation, climate change and pressures on agriculture, and the diversification role of precious metals.