The third quarter of 2026 delivered positive returns for members of both the Cost-of-Living Allowance Fund and the Holiday Allowance Fund. At the end of the third quarter, the year-to-date return was 3.5 per cent in LD Discretionary, which is the largest investment fund within the Cost-of-Living Allowance Fund, whilst the corresponding figure was 6.5 per cent in the Employees' Holiday Allowance Fund.
Rising interest rates put pressure on bonds
Rising interest rates have led to falling bond prices. The interest rate rises stemmed, amongst other things, from the unrest in the Middle East, which has led to high energy prices. High energy prices increase the risk of inflation, as price rises can spread to the rest of the economy. This prompted several major central banks to raise interest rates in the third quarter. For the US Federal Reserve, this was the first interest rate rise since 2023, and further rises may be on the way.
When interest rates rise, bond prices fall, which affects returns. The rising interest rates have had a particular impact on returns in the Cost-of-Living Allowance Fund, as the proportion of bonds is higher here than in the Employees' Holiday Allowance Fund.
Strong earnings boosted share prices
The trend on the equity markets was more positive. The second-quarter results from a large number of leading companies were among the strongest seen in many years. The largest US companies, in particular, delivered solid earnings. Both US and European share indices reached new record highs in August.
Sentiment surrounding artificial intelligence is changing rapidly, leading to significant volatility in AI-related shares. In July, chip shares fell sharply due to investors’ doubts about the value of major AI investments. By August, the trend had already reversed, as financial results – including those from Nvidia – showed continued strong demand for AI technology.
The trend has been favourable for the employees' Holiday Allowance Fund. The portfolio comprises a relatively large proportion of global equities and has therefore benefited from the new record highs.
Positive returns despite ongoing uncertainty
Developments in the financial markets over the coming months will depend, amongst other things, on whether inflation falls or whether central banks raise interest rates further. Added to this are trends in energy prices, the geopolitical situation and whether major investments in artificial intelligence can continue to be translated into returns. The first three quarters of the year show that members can still achieve good returns, even when market uncertainty is high.
