Investors have found their emotional resilience tested in 2026, as strong equity market performance at a headline level has masked some stormy waters.
According to data from FE fundinfo, major global markets are up around 11.6% to 21% year-to-date. However, to get there, investors have dealt with rapidly fluctuating interest rate expectations, a whipsawing oil price due to geopolitical conflict and sharp sell-offs.
While this level of market noise can prove challenging for investors, Fiona Ker, fund manager at Ruffer, welcomed some of the opportunities it has presented.
“We actually quite like when you can see the market start panicking,” she told Portfolio Adviser. “If you can see selling that you don’t agree with, that’s a good opportunity to start being reasonably bold.”
One of the biggest examples of this, she said, was how Ruffer adjusted the portfolios in response to the outbreak of the US-Iran war in March. The market was originally pricing in two rate cuts for the Bank of England before the conflict, due to weak economic data and a struggling labour market, she said.
But the rapidly rising oil prices and the potential inflationary impact led to some very sudden changes in expectations, she added.
See also: Bank of England holds rates at 3.75% in widely expected decision
“Yields moved nearly 100 basis points in the span of a month, and the expectation flipped from two cuts to two hikes.
“This is a massive policy change for the market to have priced, but based on our economic research, it just seemed unlikely the UK could sustain two hikes,” the Ruffer manager said.
The weaknesses in the labour market and economy would only become more acute if energy and food prices continued to be stretched by the conflict, she added.
As a result, the team allocated roughly 15% to the UK five-year gilt around March, she said.
“That all felt to us like a nice opportunity to add into a relatively short duration, very liquid asset, yielding almost 4.8% at its peak,” Ker noted.
These changing rate expectations also led to some of the panic we saw in software stocks this year, she said.
Software stocks, she said, had something of a private credit and sentiment problem this year. From 2021 onwards, venture capital and private credit poured into SaaS (software as a service) companies, which were regarded as having high barriers to entry and strong cash generation, she explained.
“But companies that have a lot of private credit debt were not really envisaged on the basis that interest rates would surge 500 basis points.” This meant the debt became far more expensive and gating became far more common, a lot of which centred on software stocks.
See also: Morningstar: Private credit flows yet to show signs of trouble
This coincided with rising concerns about Agentic AI’s impact on software names, she said.
SaaS companies used to charge based on the number of employees, Ker explained. On a headline level, she explained that if businesses are becoming more efficient due to AI and so hiring fewer people, that cuts into SaaS businesses’ revenue.
At the time of writing, the FTSE All World software and computer services sector is roughly flat year-to-date in sterling terms, but at the nadir was down more than 20%, according to FE fundinfo data.
However, Ker argued some of this sell-off was due to AI being “largely a moving target” that the market was struggling to price in. As a result, many of the software businesses that have underperformed have arguably not done anything wrong; they were just hit by speculation, she said
As an example of this rampant speculation, she pointed to the Citrini report, an opinion piece released in February on what 2028 would look like if AI progressed as current expectations suggested.
“It was fascinating because lots of stocks sold off on the back of it,” she said. “This wasn’t a piece of research or anything; it was a thought piece, and you saw stocks like IBM sell off mid to high single digits on the back of it.”
However, for the Ruffer team, this provided an opportunity to selectively increase their software exposure.
“The market is underappreciating the benefit of many incumbents and the benefits of management teams to adjust to a changing landscape and the competition,” she argued.
“I think that gives some exciting opportunities in what have historically been very well-regarded, high-quality companies that are now being doubted by the market,” Ker said.
See also: Baillie Gifford’s James: The market is being too simplistic with software businesses.
