LO Funds
All Roads Enhanced

MACRO AND MARKET REVIEW

In contrast to its usual seasonal pattern, August 2026 proved particularly favourable for cyclical assets. Global equities gained between 2.5% and 3.5%, compared with an average August return of -0.9% over the past twenty-five years. Several factors combined to drive this positive performance, foremost among them corporate earnings and, more broadly, the improvement in fundamentals. The second-quarter earnings season provided further support to valuations, with 90% of companies exceeding consensus expectations, while global corporate earnings delivered a positive surprise of more than 20% on a rolling twelve-month basis. The rally is therefore no longer solely driven by a single sector, namely artificial intelligence, but reflects a broader economic improvement across the sectors represented in global equity indices. Yet, despite their gains in August, equity markets remain some way from fully pricing in this improvement in fundamentals. Over the past twelve months, global equities have risen by less than 20%, while earnings have surprised positively by almost 30%. Prices are therefore rising more slowly than profits, which explains why equities are now less expensive than they were at the beginning of the year, with P/E ratios declining from 20 to 18.5. This development, which stands in marked contrast to the trends observed over the past thirty years, is probably linked to the rise in interest rates. August marked the sixth consecutive monthly increase in yields, mechanically compressing valuation multiples. This upward trend reflects a combination of factors, ranging from the broad increase in public indebtedness to the acceleration in bond issuance intended to finance artificial intelligence investment. By mid-August, the five largest hyperscalers had issued approximately USD 132 billion of bonds since the beginning of the year, compared with an annual average of around USD 35 billion between 2020 and 2024, while estimates of total AI-related debt issuance in 2026 range from USD 300 billion to USD 570 billion. These pressures on bond supply have been compounded by the gradual withdrawal of forward guidance, through which central banks pre-commit to monetary policy decisions in order to provide markets with greater visibility. However, the rise in yields does not yet constitute a genuine threat to global equities, provided that earnings growth remains solid, and markets responded favourably to this configuration in August.

In August, the MSCI World gained 2.7%, while emerging markets rose by 3.3%. In the United States, the Nasdaq advanced by 3.9% and the S&P 500 by 2.6%, compared with a gain of 0.9% for the Russell 2000. The Euro Stoxx 50 rose by 1.0%, while the FTSE and Chinese equities declined by 0.4% and 0.5% respectively. Growth and value stocks delivered similar performances, gaining 2.6% and 2.4% respectively. Automobiles, materials and information technology stood out, rising by 11.9%, 9.5% and 6.1% respectively, while defensive sectors underperformed, consistent with the broader improvement seen across most sectors. In sovereign bond markets, US 10-year and 2-year yields increased by 2 and 5 bps respectively, while German 2-year and 10-year yields both rose by 12 bps. Credit markets remained well supported, with US high-yield spreads tightening by 18 bps and emerging-market spreads by 15 bps. Finally, the Bloomberg Commodity Index (BCOM) gained 7.1%, supported in particular by precious metals and gold, which rose by 10.1% and 9.7% respectively, while the dollar declined by 0.5%.

PORTFOLIO ACTIVITY

Portfolio exposure slightly increased over the month, reaching approximately 375%, while expected shortfall remained at its full 22.5% target and allocation continued to rotate away from sovereign bonds towards cyclical assets (high-yield credit, equities, and commodities). Our volatility estimates decreased across all asset classes, with a sharp mean reversion on emerging equity markets following last month’s surge. Momentum signals mirrored this bullish picture with the trend remaining largely positive for cyclical assets and negative for sovereign bonds. Our aggregate risk-appetite indicator remained in Risk-On territory – an almost uninterrupted state since the beginning of the year. On the macro side, inflation-related indicators continued to ease globally, while growth data keeps improving. Additionally, our monetary policy signals range from neutral to dovish, with the most accommodative readings observed in the US and Switzerland.

PERFORMANCE

In August 2026, LO Funds IV–All Roads Enhanced was up 1.9% (USD IA share class). Over the month, commodities and developed equities were the strongest contributors, adding 80 bps and 70 bps, respectively. Fixed income performance was, however, challenged as sovereign bonds detracted 100 bps while corporate credit and emerging debt contributed a joint 60 bps. Additionally, our overlay strategies contributed 35 bps with macro and trend up, and carry slightly down.

OUTLOOK

September is generally a challenging month for investors and, like August, has a relatively unfavourable historical performance record. Nevertheless, the growth outlook remains solid as the year draws to a close, while the scale of productivity gains and the continued rise in artificial intelligence investment continue to support expectations. If productivity continues to underpin corporate profits, it could also contribute to disinflation and, in turn, help stabilise long-term yields. This is currently one of the main issues facing markets: while rising long-term yields weigh on valuations, their stabilisation could allow bonds to become not only a source of diversification but also a genuine source of income for large diversified portfolios. September could therefore mark the emergence of a global fixed-income opportunity capable of supporting portfolio performance beyond the advance in cyclical assets alone.