Alex Harvey, CFA - Senior Portfolio Manager & Investment Strategist
By anyone’s standards the first three months of 2026 have been an extraordinary roller coaster of geopolitical posturing and market volatility. For all the headlines, one might be surprised that global equities were ‘only’ down 3.5% for the period, and US treasuries were flat. Were you not looking under the bonnet you’d be forgiven for thinking it wasn’t just some modest profit taking on the 22% gains racked up by the MSCI ACWI index in 2025. Not so. Markets brushed off the Venezuela skirmish in January with little concern before tensions escalated into full conflict in the Middle East. January and February’s gains dissipated within a week as investors took fright over the implications for risk appetite and global growth of a protracted conflict between the US and Iran and their respective proxies and proteges. Despite President Trump’s claims of regime change in Iran, the reality of supremacy passing from Ayatollah Khamenei senior to Ayatollah Khamenei junior – injured or otherwise – is that little has changed in that regard. At the time of writing, the US and Iran are observing a tentative ceasefire on condition the Strait of Hormuz be reopened. Continued bombing of Southern Lebanon by Israel is testing the peace.
Headline asset class returns also masked much greater dispersion across geographies, sectors and styles. Global value equities generated modest gains, whilst growth equities fell almost 9% and the ‘Mag7’ index was down over 11% with positive earnings being crowded out by a sharp revaluation lower to a more sensible level. Regionally there were bright spots in the UK and Japan and even Eastern European equities as attention shifted to the Middle East. Core European markets were hit much harder as for the second time in four years the prospect of a lasting energy price shock knocked earnings expectations and broader risk appetite from the region. The DAX – Germany’s blue-chip index which has a weighty industrial component sensitive to energy input costs – fell 7.4% over the quarter (peak to trough nearer 13%). In Asia ex Japan markets equities largely followed suit marking lower as the high-growth, energy-poor region weighed the cost of their oil imports. The geopolitical conflict pivot of course plays out well for Russia whose sanctioned oil becomes a more prized asset which is shipped mostly to Asia by a ‘shadow fleet’ of oil tankers, with China and India buying more than 80% of their crude oil.
Source: Bloomberg Finance L.P., as at 31 March 2026.
The escalation of tension between the US and Iran into a full-blown war had significant ramifications resulting in the de facto closure of the Strait of Hormuz through which passes some 20% of global oil supplies. The oil price surged by almost 30% in the first week of March and bonds fell sharply as the inflationary impulse and more hawkish central bank stance embedded into market pricing. In the UK rates markets went from pricing two cuts before year end to pricing over four hikes before falling back as word of mediated talks emerged. This pattern of pricing was seen across markets globally, but Europe bore the brunt. None of the major central banks changed their policy rate during the quarter but there was certainly a pivot in expectations amongst policy setters, and clearly a protracted conflict and elevated energy prices would have implications for global growth, with history evidencing energy shocks as potential recessionary precursors. As the bombing continued and the Strait remained closed, so the narrative shifted from inflationary shock to growth concerns and with that the need for more accommodative policy further out should a resolution not be reached. Whilst we have a tentative ceasefire in place today, the jury is out on if and how long it lasts, and markets remain skittish. One might ordinarily expect gold to provide a haven at times like these but instead it fell sharply – almost 20% peak to trough in March, a similarly sized move to its late January correction which subsequently rebounded. Nonetheless it ended the quarter up over 7% with silver trailing but positive, and platinum and palladium both underwater for the period. Precious metals always reflect in part (inversely) the movement of the dollar in which they are denominated, and it was indeed a better period for the US dollar which having fallen through 2025 - and by any measure had become something of a consensus short - found a bid amongst the turmoil, up against most of the majors and a basket of emerging market currencies.
Market implied number of rate cuts/hikes in the UK through December 2026
Source: Bloomberg Finance L.P., as at 31 March 2026.
With the war raging over the Middle East and of course still in Ukraine, for the first time in months artificial intelligence (AI) seemed to drop down the newsflow, but its impact was still very much being felt across the software as a service (SaaS) industry. There is little doubt that AI will have a lasting impact – and bring efficiency gains – to a swathe of companies operating in this space, and in time beyond, but the data these companies hold is the key enabler to providing their service, be that automated or more ‘humanly’ provided. AI can only work with the data available to it so undoubtedly some babies will have been thrown out with the digital bathwater. For now, investors remain wary of the sector which had a torrid quarter during which the S&P Software and Services index fell 24%. Linked to this equity malaise is the financing part of the equation and whilst it’s not a straight overlap in terms of underlying companies, the asset lite nature of this sector has attracted private capital in the form of private debt, an evolving asset class that is only really being tested now for the first time. Business development companies (BDCs) in the US have become the poster child for the problems manifesting in private debt and the S&P BDC index marked 13% lower over the quarter. As private funds face mounting redemption requests and start gating vehicles, portfolio ‘marks’ – the levels at which underlying loans are priced – will come under increasing pressure. Public credit markets have remained remarkably resilient, and only time will tell if and how much cross-contamination there has been but at a sector level there is considerably less exposure in public credit, and credit spread widening has been mostly confined to the broader risk-off sentiment associated with the military conflict.
Business Development Companies (BDCs) come under increased pressure
Source: Bloomberg Finance L.P., as at 31 March 2026.
As we progress into April markets have welcomed the ceasefire and rebounded strongly as oil prices dropped sharply, if temporarily. It is far too early to point to any fundamental improvement, and the positive narrative perhaps lends itself as much to short covering as it does to a genuine improvement in risk appetite. Either way, whether one views it through an investment lens or a humanitarian one, it is undoubtedly a welcome development. We had been enjoying a period of improving active manager performance (versus passive) as dispersion amongst stocks increased and the relentless rise of the ‘megacaps’ paused for breath. We currently find ourselves back in something of a ‘RORO’ (risk on, risk off) environment with Trump’s ultimatums dictating the RORO regime from week to week. As naturally diversified multi asset investors we position for a longer game that favours maintaining a core allocation across asset classes with cash used sparingly and opportunistically to pivot towards more attractive risk premia. Whipsawing markets tend not to favour attempts at market timing, and we have stayed broadly invested through this quarter. Aside from the war and broader geopolitical tensions, equity markets continue to embed mid-teens earnings growth through 2026 which feels healthy even without the oppressive newsflow. For that reason, we continue to advocate maintaining a diverse allocation and avoid overconcentrating to countries, sectors, styles or themes. 2022 was a year best avoided and one where you’d take the flat return gold offered over the deeply negative 60/40 portfolio. With the yellow metal sitting some 160% higher than where it ended that year, it’s unlikely to offer the same shelter again. Its recent declines during periods of heightened risk aversion attests to it being used not so much as a diversifier but as a source of cash, suggesting there may yet be more excess leverage in the system looking for a way out.
