The Energy Shock

The first three months of 2026 saw early gains across many markets give way to a sharp reversal as geopolitical events took hold.

Questions emerged early in the year over whether the enormous sums being deployed into AI infrastructure would translate into meaningful near-term returns, with investors moving away from the big tech sector. The resulting sell-off triggered a broader private credit scare, raising questions about valuations and credit quality well beyond public equities. 

Then in March, everything changed, US-Israeli military action against Iran triggered the closure of the Strait of Hormuz, unleashing a severe energy price shock.

Global stocks ended the quarter down 1.3%, masking significant regional divergence and day to day volatility. 

The UK outperformed most major markets, returning 3.4%, aided by its significant energy sector weighting. Japan also delivered 3.4%, buoyed by Prime Minister Takaichi's anticipated fiscal stimulus programme, though March's oil shock hit the import-dependent economy hard. Emerging markets held on to a 1.8% gain despite a turbulent close to the quarter, as earlier dollar weakness provided a buffer against the March sell-off.

US large caps fell 2.4% over the quarter, with US technology large caps declining 5.1% as the AI reassessment weighed throughout. US domestic energy independence, however, meant it was the most resilient major market in March. Europe fell 2.3% and China declined 5.6%, where weak consumer demand continued to cause concern.

Brent crude oil surged 74.3% over the quarter as a whole, as the closure of the Strait of Hormuz threatened approximately 20 million barrels per day of global supply. Gold delivered 7.1% as a safe-haven asset, although it gave back gains in March as investors were forced to raise cash amid the volatility.

Fixed income offered little protection. UK gilts fell 1.9% over the quarter, with the global bond index broadly flat at -0.2%. With inflation risks reigniting, the Federal Reserve, Bank of England and ECB all held rates and adopted a hawkish tone, a sharp reversal from the rate-cut expectations that had prevailed earlier in the year.

The announcement of a US-Iran ceasefire has provided encouragement, with markets recovering quickly.

Uncertainty remains, and while oil prices remain above pre-war levels, if the ceasefire holds, the conditions for recovery are firmly in place, with growth signals improving and inflation dissipating before the conflict began. The longer-term AI productivity story also remains intact, and the energy shock, while severe, has not yet altered the underlying case for global growth.

Portfolios have navigated a quarter marked by significant geopolitical uncertainty and volatility.  We have not been immune to the downside, but have avoided the worst of the market falls.  We continue to expect our investment managers not to rush into reactive portfolio changes, instead positioning investments to capitalise on opportunities as clarity emerges. We prefer managers guided by long-term fundamentals and a disciplined approach to block out short term noise.