Q1 2026 Market Commentary: Global Economic and Investment Update

A strong start to 2026 was disrupted by escalating geopolitical tensions in the Middle East, driving sharp moves across equity, bond and commodity markets, shifting interest rate expectations and creating a more uncertain outlook for investors.

UK
UK equities proved relatively resilient despite volatility, supported by commodity exposure, while rising energy prices and shifting rate expectations weighed heavily on gilts and smaller companies.

US
US markets lagged amid geopolitical pressures and tech sector concerns, though relative energy independence and stable inflation expectations helped support Treasury performance.

Europe
European markets declined as rising energy prices and inflation concerns shifted policy expectations, putting pressure on both equities and bonds.

APAC & EM
Asian and emerging markets delivered mixed returns, with early gains reversed by energy-driven risk aversion and geopolitical uncertainty.

Alternatives
Commodities experienced extreme volatility, with sharp swings in precious metals and a significant surge in oil and gas prices driven by supply fears.

Sustainability
Regulatory progress in UK sustainability reporting was overshadowed by the energy crisis, which may ultimately accelerate the transition towards renewable and diversified energy sources.

Performance
A volatile end to the quarter left returns broadly flat, highlighting the importance of diversification amid rapid market rotations and geopolitical-driven uncertainty.

UK

A strong start to the year for UK equities was dashed by explosive escalation in the Middle East. The FTSE 100 had returned over 10% YTD on the eve of the first strikes, before retracing much of those gains, finishing the quarter up 3.42%.¹ Considering this, the All-Share performed better than most markets during the quarter,² boosted in part by its commodities exposure.

The FTSE 250 suffered to a much greater extent, finishing the quarter down 5.05%³ in large part due to the increasingly hostile-looking interest rate environment under which small and mid-cap businesses will suffer most.

There was much early optimism for Bank of England rate cuts in 2026, as the inflation environment began to cool and the labour market began to soften. However, the shock to energy prices caused by the war with Iran put this optimism to bed, with markets now pricing in at least 3 rate hikes by year’s end.⁴ While some are sceptical on the likelihood of such an outcome – given the nature of energy price shocks and the economic environment – the hit to confidence proved punishing not only for equity markets but also fixed income.

UK gilts were the worst-performing sovereign debt of the major developed markets, with UK 10-year yields reaching their highest level since 2008.⁵ The hawkish tones from the Bank of England, the UK’s particular vulnerability to global energy shocks and the pre-existing lack of confidence in the current Chancellor have made for an unsavoury outlook.

US

The S&P 500 continued to lag its peers after being the weakest of the major markets in 2025. The index had been largely flat over the first two months of the year in Sterling terms before the war in Iran took its toll, finishing the quarter with a loss of 2.42% in Sterling terms, or 4.33% in USD.⁶ Software stocks fell out of favour at the start of the year on fears that further advances in AI could be critically damaging to the SaaS (software as a service) business model, and on whether hyperscalers would be able to deliver adequate returns amid ballooning capex.⁷ The tech sector broadly proved to be relatively resilient in the wake of the escalation in the Middle East; the sector-specific index beat the main benchmark.⁸

US Treasuries were stable compared to their peers, remaining flat over the quarter.⁹ The US is markedly less susceptible than many of its allies to global energy price shocks, given it is a net energy exporter. This, combined with a softening labour market, means inflation expectations in the US remain relatively neutral, with the Federal Reserve signalling a neutral-to-dovish stance at its latest meeting.

Europe

European equities suffered from the elevated tensions in the Middle East. The MSCI Europe ex-UK index finished the quarter 2.18% down, despite a strong January and February.¹⁰ While not reaching the extraordinary levels seen during the initial stages of the Russian invasion of Ukraine, European gas prices did increase, leading to concerns around inflation and the region’s growth outlook.

The European Central Bank (ECB) kept interest rates unchanged at its previous meeting, and while there was an increase in the annual inflation rate from 1.9% to 2.5% as of March, higher energy prices have created material upside risk for near-term inflation, while also bringing growth forecasts down.¹¹ All of this has shifted policy expectations, with a greater chance of interest rate hikes if the energy price increases feed through into inflation figures. ECB policymaker Joachim Nagel has said the Bank will act “quickly and decisively” if inflation persists.

All of this put pressure on bonds, pushing yields upward on the expectations of higher inflation and elevated interest rates. While not experiencing a quarterly decline as bad as the UK, Euro Government bonds fell 0.57% over the quarter.¹²

APAC & EM

One of the strongest performing major equity markets was Japan, with the TOPIX index ending the quarter 3.64% up in local currency terms.¹³ As an export-oriented index, the Yen weakness supported equities, and the victory of the ruling Liberal Democratic Party sparked hopes of growth-supporting stimulus. However, as a country that relies heavily on imports for its energy needs (much of which comes from the Middle East), they are extremely exposed to global supply shocks.

Broader indices were mixed, with MSCI Emerging Markets and MSCI Asia Ex-Japan falling 0.1% and 1.13% respectively in USD terms. Like Japan, much of the region relies on imported energy, so we saw risk-off sentiment hit these markets in March. This reversed the positive performance seen early on in Q1, where countries such as Taiwan and South Korea benefited from AI/Tech momentum.

Elsewhere, China is placed in an interesting position with regard to the conflict in the Middle East. While still the world’s largest energy importer, there are several factors that will cushion the impact. Their relationship with Iran has helped bolster the Yuan. Under Iran’s control of the Strait of Hormuz and the toll booth regime, there are several reports that commercial vessels are being charged transit fees in Yuan.¹⁴ Their access to Russian energy should also help reduce the impact of the Strait’s closure.

Alternatives

Precious metals – long-time standout performers – provided significant volatility. Gold soared to a new record of $5,589/oz in late January, while Silver gained around 64% in just 4 weeks.¹⁵ Trump’s nomination of Kevin Warsh as prospective Federal Reserve Chairman followed soon after.

Warsh’s nomination came with a great shift in future interest rate expectations, due to his typically hawkish stance. This, in turn, strengthened the Dollar, and these two factors triggered a deep selloff, with Silver losing around a quarter of its value in one session, and Gold falling almost 10%.¹⁶ Just as the recovery gained traction, the deteriorating situation in the Middle East prompted another selloff, as investors preferred the Dollar and short-term Treasuries as safe havens during the latest global shock due to their presently attractive yields.

The second consequence of the US-Israeli attacks on Iran and subsequent Iranian strikes on Gulf states was a sharp rise in the prices of Oil and Gas. Fears of global shortages and cost spikes were exacerbated as Iran began striking civilian vessels in the crucial Strait of Hormuz, effectively closing the passage for all vessels not allied with the Republic. Brent Crude rose over 90% on the quarter, closing at just over $118/bbl.¹⁷

Sustainability

Q1 saw some important regulatory developments in the UK. In February, the final UK Sustainability Reporting Standards (SRS) were published by the Department for Business and Trade. These disclosures match very closely with the International Sustainability Standards Board (ISSB) and aim to provide investors with comparable and decision-useful information supporting the efficient allocation of capital, and the smooth running of capital markets. Areas of SRS cover general sustainability disclosures, along with climate-related disclosures, such as emissions reporting, scenario analysis, and climate transition plans. While not yet mandatory, the Financial Conduct Authority (FCA) has launched a consultation on mandatory adoption for listed companies.¹⁸

The current energy crisis, caused by the war in the Middle East and the near closure of the Strait of Hormuz, is likely to have large implications with regard to the energy mix. International Energy Agency (IEA) Executive Director Fatih Birol has highlighted the severity of the situation but argued that in the longer-term: “The architecture of the global energy system will change”; and anticipated an acceleration in renewable energy, citing sources such as solar and wind, which have short installation timelines. Revived momentum for nuclear energy, including small modular reactors (SMRs) could also be seen as a way to diversify from current energy dependencies.¹⁹

Performance

After a strong opening to the year, a volatile March hurt returns and left things broadly flat over the quarter. Unfortunately, there were few areas of respite in the final month of the quarter, almost mirroring periods of 2022 where commodities/energy were the standout asset class. It has been mentioned all too much in this quarter’s review, but the heightened tensions with war in the Middle East had a significant impact on oil and gas prices and led to a large risk-off event.
Naturally, value fared better than growth, however much of this was due to the large rotation away from mega-cap names earlier on in the quarter. The often more defensive nature of value stocks also helped in the latter stages. Similarly, the conditions were tougher for our sustainable model, lacking exposure to commodity, defence, etc, names.

We did benefit from the introduction of some sector-specific funds that feature in some of our models (namely energy and utilities), so when the conflict escalated, we felt these portfolios were in a good place. Looking forward, we feel maintaining a suitable level of diversification is essential. The price moves seen over the quarter have been nothing short of extraordinary, so any knee-jerk reactions run the risk of being caught on the wrong side of this volatility.

1 Morningstar Direct
2 https://am.jpmorgan.com/be/en/asset-management/adv/insights/market-insights/market-updates/monthly-market-review/
3 Morningstar Direct
4 https://www.independent.co.uk/news/business/interest-rates-gilts-bond-yields-iran-uk-inflation-b2943709.html
5 https://www.morningstar.com/news/dow-jones/202603203115/ten-year-gilt-yields-hit-highest-since-2008-as-uk-public-finances-deteriorate
6 Morningstar Direct
7 https://am.jpmorgan.com/be/en/asset-management/adv/insights/market-insights/market-updates/monthly-market-review/
8 Morningstar Direct
9 Morningstar Direct
10 Morningstar Direct MSCI Europe Ex-UK EUR Q1 2026
11 https://www.ecb.europa.eu/press/pr/date/2026/html/ecb.mp260319~3057739775.en.html
12 Morningstar Bloomberg Euro Aggregate Government Bond EUR Q1 2026
13 Morningstar TOPIX TR JPY Q1 2026
14 https://www.aljazeera.com/economy/2026/4/8/in-strait-of-hormuz-iran-and-china-take-aim-at-us-dollar-hegemony
15 https://dillongage.com/blog/gold-and-silver-rose-on-haven-demand/
16 https://www.reuters.com/markets/commodities/specter-warsh-fed-sparks-precious-metals-debasement-crash-2026-02-02/#:~:text=ORLANDO%2C%20Florida%2C%20Feb%202%20(,Enter%20Kevin%20Warsh.
17 https://www.eia.gov/todayinenergy/detail.php?id=67424#:~:text=and%20refinery%20inputs.-,Crude%20oil%20prices,UAE%E2%80%94shut%20in%20oil%20production.
18 https://www.macfarlanes.com/insights/102mlw9/the-final-uk-sustainability-reporting-standards-and-implications-for-asset-manage/
19 https://energynews.pro/en/iea-chief-says-current-energy-crisis-exceeds-1973-1979-and-2022-combined