Global Markets
Note: All quoted equity performance figures are in GBP terms.
The first quarter of 2026 was marked by a sharp rise in geopolitical tensions, particularly the ongoing conflict in the Middle East and its ripple effects on global energy markets. Combined with weaker corporate earnings, these factors contributed to heightened volatility in global equity markets and a decline in the MSCI World Index by 1.6%.
Developed markets led the correction, with the S&P 500 and FTSE Europe ex UK falling 2.40% and 2.00% respectively and losses concentrated in technology and cyclical sectors. The quarter began positively on year-end momentum as performance broadened beyond its typically narrow leadership. Shortly into the quarter however, large technology firms saw sharp sell-offs as investors questioned whether the substantial capital expenditure on artificial intelligence would generate the profits priced into valuations. Traditional software companies also underperformed, while small-cap equities and non-technology sectors delivered stronger returns.
In contrast, commodity markets rose over the quarter as mounting geopolitical tensions in the Middle East, including U.S. and Israeli strikes on Iran, heightened fears about energy supply security. The conflict brought focus to the Strait of Hormuz, a key transit route for roughly 20% of global oil flows and a major channel of natural gas. Disruptions and uncertainty surrounding this critical channel drove crude oil prices sharply higher, adding to the volatility across global financial markets.
Emerging market equities delivered mixed performance over Q1, as commodity price volatility softened investor confidence. Higher energy prices and a stronger US dollar created headwinds for several regions, while concerns around China’s growth outlook continued to limit broader emerging market gains. However, performance diverged across regions, with parts of Latin America benefiting from commodity exposure and Korean equities supported by strength in technology and domestic demand. As a result, select markets proved resilient despite an increasingly challenging global backdrop.
Japan was the strongest performer, with the TOPIX rising 4.20% over the quarter. This gain was supported by a weaker yen and the Liberal Democratic Party’s decisive electoral victory in February.
The UK market also managed a modest advance, helped by a softer pound and strength in the energy sector. Despite the late-quarter pullback, the FTSE All Share still ended the quarter up 2.40% after reaching several record highs in February.
Equity Styles
While small-cap equities started off the quarter with stronger relative returns, large-cap equities outperformed over the quarter underpinned by their relative resilience amid geopolitical uncertainty. Growth stocks, particularly within the technology sector, lagged as weaker earnings weighed on sentiment while value-oriented sectors drew support from investors’ shift toward more defensive positioning. As a result, value outperformed growth for a second consecutive quarter.
Inflation
At the start of the year, investors expected gradual monetary easing across developed markets as inflation moderated in January. However, the escalation of conflict in the Middle East reversed that outlook by driving up energy prices and reigniting inflation concerns.
The Bank of England unanimously kept interest rates at 3.75% in March, citing higher energy costs and renewed upside risks. The UK’s reliance on imported oil and gas, which accounts for around 40% of total supply, leaves it especially exposed to global price shocks that quickly feed through to households and businesses. Inflation held steady at 3.00% in February but forecasts now point to a possible rise toward 4.00%, adding to the Bank’s policy challenge.
Inflationary pressures were also evident elsewhere, with the Federal Reserve, European Central Bank, and Bank of Japan all leaving rates unchanged at their March meetings as they adopted a wait-and-see approach.
Fixed Income
Note: All quoted fixed income performance figures are in GBP-hedged terms.
Fixed income markets also struggled over the quarter. UK and European government bonds underperformed, reflecting their greater exposure to energy imports, while US Treasuries were more resilient due to their safe-haven appeal. UK Gilt yields were particularly volatile, as markets shifted from pricing in rate cuts to pricing in multiple potential rate hikes by year-end.
Corporate bonds also came under pressure as heightened volatility and a more risk‑averse investor backdrop led to spread widening across both investment‑grade and high‑yield bonds. While defaults remained contained, investors demanded higher compensation for credit risk, reflecting increased uncertainty around growth, financing conditions and corporate earnings resilience.
The index returns quoted are provided for context only and may not reflect the actual performance of your portfolio. Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise.
If you would like to discuss how recent market developments may affect your portfolio or investment strategy, please contact your adviser.
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