Dear Client,
As we reached the end of the second quarter of 2026, financial markets were subjected to significant geopolitical tensions (Iran) and a shift in central banks' approach to interest rates, resulting in considerable market volatility and speculative fluctuations.
Should this encourage long-term investors, whose objective is investment rather than speculation, to abandon their investment strategy? We do not believe so. However, we do believe that the current environment warrants certain adjustments to investment portfolios in order to adapt to changing circumstances.
WHAT SHOULD WE BE WATCHING?
Kevin Warsh's appointment as Chairman of the US Federal Reserve signals a shift in expectations regarding the path of official interest rates and has been welcomed positively by markets, as it reflects a more orthodox approach to monetary policy.
The President of the European Central Bank has also adjusted monetary policy in response to the inflationary risks exacerbated by the conflict involving Iran.
Both institutions are seeking to avoid a repeat of the excessive complacency displayed in 2021, when the rise in inflation was characterised as transitory.
This change in monetary policy direction has important implications for investors:
- A recovery in the US dollar (temporary?).
- A recovery in the prices of long-term government bonds, accompanied by a decline in yields.
- A significant correction in the price of gold.
The enormous levels of public debt accumulated by a number of countries, particularly the United States, pose a significant financing challenge. This is especially relevant when refinancing relies heavily on short-term debt issuance. Figure 1 illustrates the situation in the United States.
KEY INVESTOR CONSIDERATION: CONCENTRATION RISK
The US economy continues to grow at a faster pace than the European economy. However, an increasing share of that growth is concentrated in the extraordinary level of investment linked to artificial intelligence. Moreover, these investments are increasingly being financed through debt, adding balance-sheet risk to the underlying business risk and expected future returns.
Until recently, leadership in AI-related investments belonged primarily to the so-called Magnificent Seven, whose disproportionate weight in the S&P 500 has long been a concern for EDM. In recent weeks, however, investor attention has become concentrated in semiconductor manufacturers. Once again, concentration risk is increasing as automated investment strategies rapidly channel capital towards specific sectors.
Figure 2 illustrates how a relatively small segment of the market—semiconductors—has come to lead, and in some cases even outperform, the sector index itself. Trend-following (indexed) and factor-based (sector) investing are increasingly displacing the traditional selection of high-quality individual companies. The question is: for how long?
WHAT ABOUT EUROPE?
Many clients ask us about Europe and its economy. Faced with political pressure from the United States and industrial competition from China, Europe finds itself at a crossroads. While policy responses are gradually emerging, they are arguably not being implemented at the pace required.
Several recent developments have reshaped the European landscape:
- Disagreements regarding the development of an autonomous European defence capability, an area that will inevitably require substantial investment and which was one of the strongest drivers of European equity markets during 2025.
- Volkswagen's severe workforce reductions, driven by regulatory pressures and increasing competition from Chinese manufacturers.
The portfolio of European companies selected by EDM continues to deliver long-term earnings-per-share (EPS) growth of approximately 10% per annum. It is therefore no coincidence that this has also been the internal rate of return (IRR) achieved by the EDM International – Strategy Fund over the last seven years.
EDM MANAGED PORTFOLIOS: GEOGRAPHIC AND SECTOR DIVERSIFICATION
In my first-quarter 2026 letter, I announced that we had undertaken a reassessment of our investment policy, while remaining true to our defining principle: invest, don't speculate. As a result, we have continued to diversify portfolios both geographically and across sectors:
- Increasing exposure to a broader range of economic sectors across Europe.
- Expanding into new geographic regions, particularly Asia and, especially, China.
- Establishing exposure to selected emerging markets, including Latin America.
- Maintaining a focus on small- and mid-cap companies, where we believe valuation risk remains limited compared with larger market segments.
In addition, we have reviewed, updated and, where appropriate, replaced certain external managers to whom we delegate investment management in geographic areas where EDM cannot provide the same degree of added value directly. These changes affect our investments in both the United States and China. They are intended to broaden sector exposure in response to the speed at which market leadership is currently evolving.
I hope this letter provides a measure of reassurance during a summer that has begun under challenging conditions and reminds us of the value of perspective, prudence and a long-term approach. These principles continue to guide our efforts every day.
Thank you once again for the trust you place in us. We wish you a very enjoyable summer.
Yours sincerely,
Carlos Llamas
Chief Executive Officer
CONSIDERACIONES LEGALES
1) This document is provided for advertising and informational purposes only. It does not constitute, and should not be construed as, investment advice or legal advice. Nor does it seek to replace any professional advice that may be required in such matters. Furthermore, it does not constitute an offer to sell or a solicitation of an offer to buy any financial instrument or investment product.
2) All opinions and estimates contained herein have been prepared using sources believed to be reliable. Nevertheless, EDM Gestión, SAU, SGIIC does not warrant their accuracy or completeness and accepts no liability whatsoever for any direct or indirect loss arising from the use of the information contained in this document.
3) This document contains information relating to the past performance of the products referred to herein. EDM Gestión, SAU, SGIIC expressly notes that past performance is not a reliable indicator of future results.
4) Investors should be aware that the products referred to in this document may not be suitable for their specific investment objectives, financial circumstances, net worth or risk profile. Accordingly, they should make their own investment decisions in light of such circumstances and obtain any specialised tax, legal, financial, regulatory, accounting or other professional advice they may require.
5) The financial instruments referred to herein are subject to a range of common risks, including but not limited to:
• Market fluctuations arising from unforeseeable events.
• Liquidity risk and other factors that may affect the performance of an investment.
6) This document may contain information expressed in currencies other than those used by its recipients. Investors should therefore take into account the possibility that exchange-rate fluctuations, whether favourable or unfavourable, may affect the performance of the products or instruments discussed.
7) For each fund managed by EDM Gestión, SAU, SGIIC, the full prospectus, Key Investor Information Document (or equivalent regulatory documentation), periodic reports and latest audited annual report are available free of charge from the management company's registered office or via www.edm.es.
8) EDM Gestión, SAU, SGIIC is a Spanish limited liability company duly registered with the CNMV's Register of Management Companies of Collective Investment Schemes under registration number 49, and with the Madrid Mercantile Registry under Volume 36,739, Folio 52, Sheet M-658,326, Tax Identification Number (CIF) A-58,217,175. Its activities include, among others, the representation, management and administration of Spanish collective investment vehicles and the discretionary management of investment portfolios.
