Events in the first quarter of 2026 challenged the positive conditions we previously noted for the global economy and financial markets. The global economy has, so far, proven more resilient than most commentators expected, with consensus forecasts for 2026 growth only modestly changed despite the meaningful rise in geopolitical risk. What has changed is the balance of risks: the benign mix of solid growth, easing inflation and a supportive policy environment we enjoyed through late 2025, now sits alongside a renewed energy shock and a more complicated policy and geopolitical environment. As we write, the key uncertainty is the duration of the Gulf War and whether the ceasefire will lead to a de-escalation of hostilities and an increase in the free flow of energy products through the Strait of Hormuz.
KEY POINTS
• Financial markets were mixed over the quarter. A strong start gave way to the US/Iran/Israel War and the blocking of the Strait of Hormuz, which lifted energy prices and created volatility.
• Portfolios have weathered the storm in March with resilience, despite the solid foundations of the global economy and markets being tested.
• Equities saw a derating across the board as a geopolitical risk premium was priced in and the highly rated technology sector saw valuations moderate. Earnings expectations remained robust.
• Central banks’ stances changed to a bias to tighten interest rates in those countries with elevated inflation such as Australia, and for those with a price stability mandate such as the European Central Bank. In contrast the US Federal Reserve is seen to eventually ease rates further on the back of political pressure, the softer labour market, and the productivity revival the US economy is experiencing.
• Credit markets saw some pressure as several credit managers saw outflow demand. We would note high historical yields, a modest default cycle and continued economic and policy support for the asset class. Manager selection and the absence of a recession remain key.
• We remain focused on the attractive opportunity to diversify portfolios by equity market, currency exposure, and asset class.
• In the equity market the lower valuations in Emerging Markets, Japan and Europe are accompanied by robust levels of earnings expectations, which continues to make diversifying into these markets historically attractive. Indeed, the geopolitical backdrop is likely to attract further capital into markets.