The second quarter of 2026 marked a shift from the sharp geopolitical disruption earlier in the year toward a more gradual process of normalisation and market adjustment. While tensions in the Middle East remained important, investor focus moved toward the potential for de‑escalation and what that would mean for inflation, interest rates, and broader markets.
Through May, sentiment improved meaningfully as credible progress emerged toward a potential agreement between the U.S. and Iran. This was most visible in energy markets. Oil prices, which had remained above US$110 per barrel during the height of the disruption, declined sharply through late May, falling below US$100. As we moved into June, that trend continued, with prices easing further into the roughly US$70 to $85 range by late month as expectations grew for a reopening of the Strait of Hormuz. While this reflects a meaningful reduction in the geopolitical risk premium, prices remain above pre‑crisis levels, as supply recovery is expected to take time.
The decline in energy prices helped stabilise fixed income markets. Bond yields, which had risen earlier in the quarter on inflation concerns, moved modestly lower into June as inflation expectations eased. However, central banks remained cautious. The Federal Reserve and the Bank of Canada held rates steady, signalling that while inflation pressures may be moderating, policy will remain restrictive until clearer evidence of sustained progress emerges.
Economic data over the quarter pointed to resilience. Growth moderated but remained positive, and corporate earnings were broadly stronger than expected—particularly in the U.S. and parts of Asia. Equity markets responded constructively, with global equities advancing through May and remaining relatively stable into June. Leadership continued to favour growth sectors, particularly those tied to AI and semiconductors, although returns became more selective and sensitive to interest rate expectations. Emerging markets, especially in Asia, continued to outperform, supported by strong earnings momentum.
Commodity markets beyond energy told a more mixed story. Precious metals, which had surged earlier in the year, entered a period of consolidation. Gold traded in a wide range—roughly US$4,000 to $4,500 per ounce through June—while silver pulled back more noticeably into the US$60 to $75 range, reflecting higher real yields and reduced safe-haven demand.
Base metals showed relative resilience but remained volatile. Copper traded broadly in the US$12,000 to $13,000 per tonne range, supported by supply constraints but capped by softer growth expectations.
Currency markets also reflected this evolving backdrop. The U.S. dollar strengthened modestly earlier in the quarter but began to stabilise into June as geopolitical risks eased and global growth held up.
Overall, the second quarter was defined by a transition from acute disruption toward gradual normalisation. While geopolitical risks declined at the margin, their effects on inflation, interest rates, and asset prices continued to shape markets—reinforcing the importance of diversification in navigating an environment where leadership and drivers of return remain fluid.
In this environment, the value of diversification and thoughtful portfolio design has become increasingly clear. The Balanced Fund is deliberately constructed to perform across a variety of market conditions. Its income sleeve serves as an anchor for the portfolio—providing dependable cash flow while helping dampen volatility during periods of market stress. Complementing this, the Fund’s broad equity exposure—spanning regions, industries, and market capitalizations—allows it to adapt as market leadership pivots, so that the portfolio can participate in long-term growth opportunities as they emerge.
From a portfolio management perspective, we have continued to make targeted adjustments. This has involved selectively harvesting gains in areas that have performed strongly, particularly within equities, and redeploying capital toward sectors and businesses better suited to a more inflation-aware and cyclically driven environment. Within fixed income, we have focused on strengthening the income profile while maintaining strong credit quality and limiting exposure to inflation sensitivity—further reinforcing the Fund’s stability and durability.
The Balanced Fund’s current positioning is reflective of disciplined process and market outlook, with a:
- 38% allocation to Matco’s Diversified Income Strategy
- 24% allocation to Matco’s Canadian Equity Income Strategy
- 8% allocation to Matco’s Opportunities Strategy
- 26% allocation to Matco’s Global Equity Strategy
- 3% allocation to Mortgage investments and
- a 1% allocation to cash
The Balanced Fund returned 6.8% in Q2 2026, reflecting strong gains in January and February, April and May. These gains were partially offset in March, with volatility driven by geopolitical tensions. This leaves the fund with a strong absolute return of 9.3% year to date. The Fund’s diversified structure—anchored by a 40% income allocation and balanced exposure across Canadian, global, and opportunistic equities—provided stability relative to broader markets. The income sleeve continued to generate steady yield of 4.3%, while diversified equity exposure, particularly outside North America, supported long-term growth and overall portfolio resilience.
While periods of transition can introduce short-term volatility, they also tend to create compelling investment opportunities. Markets are recalibrating to a new set of drivers, and in doing so, are rewarding selectivity, and discipline. We remain focused on identifying high-quality investments that can perform across a range of scenarios, rather than relying on a single dominant theme.
