Commentary for March 2026
Market Overview
The start of the conflict in the Middle East saw markets retreat sharply from recent highs, as they underwent a rapid re-appraisal of the outlook for inflation and interest rates following a spike in oil and gas prices. Global equities and bonds fell by 4.5% and 3.0% respectively, in volatile trading as investor sentiment vacillated between hopes for de-escalation and fears of a prolonged conflict.
On February 28, the US and Israel launched coordinated airstrikes on Iran, killing the Supreme Leader Ali Khamenei and targeting leadership, military and nuclear infrastructure. Iran retaliated with missile and drone strikes across Israel, the Gulf States and US regional assets. The Strait of Hormuz, the 3.2-kilometre-wide shipping channel through which around 20% of global oil and gas supplies transit, was effectively closed.
The consequences of the conflict reverberated through energy markets, heightening concerns about supply disruptions. The price of Brent crude oil surged from $72 per barrel on the eve of the conflict to $118, a spike of 64%. The move marked oil’s largest one-month gain on record, triggering a decline across financial markets, as investors worried that the move would lead to a re-acceleration of inflation, with negative consequences for both interest rates and growth. The gold price, typically a safe haven asset, fell by 11%, after strong gains during 2025 (the best year for gold prices since 1979) meant that it was not immune to the general trend of profit-taking among assets that had performed well.
The sell-off was broad-based, both by country and sector, with few places to hide outside of energy and defence-related stocks. Previous high-flying markets perhaps unsurprisingly experienced the sharpest falls. Asia, Japan and Europe declined by 11.6%, 10.7% and 8.2%, respectively. UK equities closed 5.9% lower. The US, which had not performed well in recent months, held up best in relative terms with a fall of 3.2%. This resilience also reflected the fact the US is a net exporter of oil and gas, providing it with a partial buffer. However, the tech-heavy NASDAQ index fell by 11% over the month.
At a sector level energy stocks were the standout performers, as producers, refiners, shipping and infrastructure companies all stand to benefit from materially higher oil prices. Basic material companies such as miners, chemical and fertilizer producers were also seen as beneficiaries of supply disruptions. In contrast, airlines, travel, consumer discretionary and financial stocks were the most negatively impacted, along with premium valuation stocks within technology and AI.
Government bonds also declined as yields moved higher amid renewed fears of a reacceleration of inflation around the world. UK Gilts faced further pressure from political uncertainty, with unease that the outcome of the May local elections could shift the power balance within the Labour Party further to the left. Investors bought near-term inflation protection, to the benefit of short-duration index-linked bonds.
UK GDP surprised to the upside in the three months to February, with growth of 0.5%, suggesting the economy was starting to recover before recent events. However, March data saw the first visible pass-through from events in the Middle East, as the inflationary picture worsened. The CPI recorded a rise to 3.3%, driven by a rise in the cost of fuel. Previous consensus had been for inflation to fall to 2% in the second quarter, but the spike in energy costs now means it is forecast to rise to 4% in coming months. As a result, the Bank of England held interest rates at 3.75%, having been widely expected to cut before the conflict broke out. Market expectations of at least two further cuts in interest rates this year have morphed into the possibility of a hike, given the rise of almost 1% in the 2-year gilt yield.
In the US, the March CPI print at 3.3% also confirmed that short term inflation is re-accelerating, undercutting the case for the Federal Reserve to lower rates anytime soon. Other macro data for March was mixed. Consumer sentiment indicators reflected the pain being felt at the pump, with the University of Michigan’s reading falling to a record low. However, The ISM manufacturing index continued to tick higher.
Looking Forward
At the time of writing, markets have rallied on news of a ceasefire between the US and Iran. While a peace deal has yet to be agreed, confidence is growing that both sides appear keen to find an off-ramp; the next stage of escalation would be damaging for everyone.
In economic terms, while a short-lived spike in the price of oil is unlikely to have a lasting impact, a sustained increase in energy costs would lead to higher inflation and weaker growth, delaying expected interest rate cuts. However, these events are unlikely to impact global corporate profits over the long term. Moreover, the possibility of rate cuts could quickly re-emerge on any resolution and drive a recovery across markets.
As inflation risks have increased the case for owning real assets has strengthened. We entered the year with a positive view on commodities. Going into the crisis energy was arguably the cheapest major asset class in the world, with both oil and natural gas trading near extreme undervaluation relative to equities, levels historically associated with major bull markets.
The supply of oil and gas is likely to remain constrained, and prices elevated for some time, even if there is a peace deal because so much infrastructure has been damaged. But the energy constraint is only the first layer. The global economy is simultaneously experiencing an unprecedented demand cycle for commodities and critical metals driven by the buildout of AI-related data centres, the modernisation of electrical grids, investment in renewable energy, military expansion and the reconstruction mandates in Ukraine and the Middle East. Higher prices will likely be required to encourage the new investment required to fund these new sources of demand.
On an economic basis the US economy remains in good health, while developed economies outside the US look less robust. However, investing in markets is not the same as investing in the underlying economies. Regional market composition and valuations paint a different picture. On a sectoral basis, the US, with its heavy technology bias and premium valuation is likely to fare worst in a more inflationary environment, as we saw in 2022 coming out of the pandemic. The UK presents a more interesting case. The market is significantly overweight energy and commodity stocks, which have performed well during past oil spikes. Its 16% weighting in consumer staples and 10% in energy are more than double any other major market’s allocation to either, while exposure to technology is minimal. Moreover, it remains one of the cheapest markets globally. Although also relatively cheap, the composition of Japanese and European markets is more challenging, as large industrial and consumer discretionary sectors are likely to present a headwind.
Our Strategy
Periods of volatility such as those seen in March are a reminder that sentiment can shift quickly, particularly when positioning is concentrated. A common pattern is that investors become more cautious after markets fall, reducing risk at precisely the point where valuations become more attractive. Over time, this tendency to react to price rather than fundamentals can lead to weaker outcomes and can help explain why the average investor earns lower returns than market.
A multi-asset approach can help balance portfolios during different market conditions. While short term events and market reactions can be unpredictable, experience shows that well diversified portfolios, anchored to long term fundamentals, are better placed to navigate volatility. Our focus is on creating resilient investment strategies to deal with a range of possible outcomes. We have explicitly considered the potential impact of a more inflationary environment in our current portfolio construction.
In this context, broader diversification incorporating additional asset classes such as precious metals and commodities remains essential. While bonds offer attractive yields and can help insulate portfolios in the case of slower growth, they will not protect portfolios if inflation remains higher for longer.
Exposure to the energy sector has been increased in recent months. Prior to recent geopolitical developments, oil was arguably the cheapest and most disfavoured major asset class in global markets. Energy equities account for a mere 3% of the total US market capitalisation – barely above the pandemic-era lows. The prevailing view has been that the oil industry belongs to a bygone era, a relic of the industrial past. The same sentiment was evident toward gold in the late 1990’s, shortly before it embarked on one of the strongest bull markets in modern history.
Our constructive view on gold and silver remains unchanged. Gold continues to play a critical role as a portfolio diversifier amid geopolitical uncertainty and concerns around government debt and currency stability. At the same time, precious metal mining equities are benefiting from strong pricing dynamics, supporting robust profitability and sector-leading growth.
Within equities, core positions are concentrated in the UK, Japan, Asia and emerging markets. In contrast, our allocation to US equities is significantly lower than a passive index market capitalisation-weighted approach. This leaves portfolios underweight the mega-cap technology stocks. The rate of return for these companies is likely to lag other parts of the market following a 15-year period of extraordinary returns. Looking forward, we believe that other markets offer a better long-term return and risk profile.
For the UK, the good news is that the market has many of the ‘old economy’ companies that are suddenly coming back into vogue. Our UK exposure is biased towards cyclical, domestic and value-orientated sectors, along with small and mid-cap companies.
Emerging markets continue to trade at a significant discount to developed market peers, despite a superior outlook for growth. We expect this valuation gap to narrow over time as investors recognise the supportive structural trends that are in place and as they feed through to corporate performance. The region is starting to see strong inflows from foreign investors who remain structurally under allocated even after their strong performance in 2025.
Japanese equities remain underpinned by attractive valuations, a pro-growth policy agenda and robust earnings. Ongoing reform of the corporate governance is designed to return more capital to shareholders through greater share buybacks and dividends, increasing shareholder value.
Overall, we continue to manage investments in a manner that allows us to capture the upside in financial markets while also effectively controlling risk to dampen volatility and smooth the path of returns.
