Keeping You Informed Matters
Economic Review April 2026
Markets entered 2026 with clear signs of change, as leadership broadened beyond the US and long-dominant growth stocks began to give way to other styles and regions. However, this evolving backdrop was abruptly disrupted by the outbreak of war in the Middle East, triggering sharp moves across energy markets and a renewed focus on inflation risks.
The Outlook
A clear rotation in markets… followed by war
The year began much as 2025 ended, with gold rising sharply and a clear rotation underway across global equity markets. Leadership was shifting away from the US towards other regions, from ‘growth’ to ‘value’ styles, from the largest companies to a broader range of sizes, and even away from ‘asset-light’ firms towards businesses with greater exposure to tangible, real assets.
This backdrop changed abruptly at the end of February, when the US and Israel launched air strikes on Iran, marking the start of the latest war in the Middle East. While some commentators argued that such an event had been foreseeable, market behaviour suggested otherwise. Conditions shifted rapidly once hostilities began, indicating that these risks had not been fully priced into assets.
Government bond yields, which had been relatively stable, moved sharply higher as investors reassessed inflation expectations. As yields rose, bond prices fell. Gold, which initially rallied as the conflict began, experienced a sharp correction slumping by around 20% at one point, before partially recovering. Equity markets also declined, modestly at first but then accelerating as the conflict escalated. The rotation within equity markets described earlier paused – whether temporarily or more persistently remains to be seen.
A long-standing concern for investors around conflicts in the Middle East has been the potential closure of the Strait of Hormuz, a critical route for global energy supply. This scenario materialised in March. The longer the disruption persisted, the greater the implications for oil, gas and related supply chains. Energy prices surged, while other commodity markets were more mixed.
What does an investment committee do when a war breaks out?
We know that planning can help produce good outcomes. As part of our ongoing process, we had already considered the potential impact of geopolitical conflict and undertaken analysis of how wars have historically affected asset prices.
Our broad conclusion is that war is inherently inflationary, except where prices are controlled by a government. Inflationary pressures typically arise from increased government spending, higher borrowing, and the rapid mobilisation of economic resources.
For asset prices, however, there is no consistent pattern. As a rough generalisation, though, we’ve observed that bonds suffer; commodity prices increase when not supressed by government; and gold holds its value. Returns from equities and currencies vary wildly, depending on several factors: starting valuations, the degree to which the war was anticipated, whether a financial crisis ensues, and how the war ends.
With this in mind, we had already considered the possibility of higher inflation, and identified which assets might cope best (or thrive) under this scenario. Some of these assets were already in portfolios before the war started. More on this later.
Once war broke out, committee members spent more time than usual seeking out information, opinions and narratives from other investors and commentators. We reviewed a wide range of information sources, assessed potential scenarios, and revisited historical precedents. We also considered whether portfolio adjustments were warranted. For example, should we reduce portfolio risk in anticipation of higher inflation and lower economic growth (i.e. ‘stagflation’) – an investing approach that would have worked well after the oil embargo of 1973/74. But what would a ‘de-risked’ portfolio even look like today?
We considered what the market was saying. By examining oil futures, it became clear that energy market participants expected the war to end relatively quickly. We monitored prediction markets, like Polymarket, that reveal market-based probabilities for events, such as whether the Strait of Hormuz would open by a certain date. By looking at bond yield curves, we could infer interest rate expectations in different countries. Generally speaking, hopes for stimulative policy rate cuts this year have diminished. Perhaps some of these market-implied expectations were flawed, and we could trade to take advantage of that? For these events in the Middle East, though, we know that we have no informational advantage over the market as a whole, and almost certainly a disadvantage compared to well-informed political insiders who do trade actively in markets.
With this in mind, markets have become increasingly sensitive to political rhetoric, particularly from the US, with often confusing and conflicting individual statements at times triggering sharp, short-term moves. Nowhere has this been more evident than in energy markets, where the oil price has acted as a real-time barometer of perceived escalation or de-escalation in the conflict.
These moves are not confined to financial markets alone, but can feed through quickly into everyday costs, most visibly at the fuel pump and, with a lag, through household energy bills. While such reactions can be pronounced, they often reflect rapidly shifting sentiment rather than durable changes in underlying fundamentals. As such, we remain cautious about responding to short-term volatility driven by headlines, and instead focus on the longer-term implications for inflation, growth, and asset valuations.
In summary, portfolios were already positioned with a degree of resilience in mind. To date, this has reduced the need for reactive changes. We continue to assess market signals carefully, and where these appear inconsistent or overly complacent, this may present longer-term opportunities… but nothing yet.
Other longer-term changes are underway
Beyond immediate market movements, the conflict is likely to have broader and more lasting implications. Geopolitical relationships are evolving, with shifting alliances and changing levels of trust between nations.
Energy policy is also likely to respond. For net energy-importing countries such as the UK, this may accelerate investment in domestic and alternative sources, including nuclear power, supported by government incentives and long-term pricing agreements.
Technologically, we can see that artificial intelligence is being integrated into warfare, with the Pentagon negotiating aggressively with Anthropic and Open AI on the permissible uses of their AI models, and Reuters reporting that they will soon adopt Palantir AI as its core military system.
While eerily reminiscent of science fiction films such as The Terminator, it may take years for us to fully understand the true impact of these developments.
Portfolios
Ethical portfolios lagged unconstrained portfolios during the quarter, largely due to the sharp rise in energy prices, which supported oil and gas companies that are not held within ethical mandates.
Unconstrained portfolios also benefited from direct commodity exposure through exchange-traded funds, which performed strongly following the escalation in energy markets. This allocation was included as a diversifier and behaved as expected during the period.
Bond markets were weaker overall, reflecting rising inflation expectations. However, our focus on shorter-dated government bonds helped to limit the impact of rising yields.
Within equities, reduced exposure to large US technology companies, alongside broader exposure across regions and company sizes, supported relative performance.
Cash and money market holdings remained stable. In addition, allocations to alternative and multi-asset strategies provided further diversification. Some of these managers are positioned to act defensively during periods of stress, while also seeking opportunities to add risk following market dislocations, which may prove beneficial as conditions evolve.
Key facts about the world
United Kingdom
- 10-year gilt yields briefly crossed 5% in March, a level not seen since the 2008 financial crisis, as the Middle East conflict sent energy prices surging.
- UK petrol rose 14p/litre and diesel 29p/litre in five weeks to 23rd March, before easing slightly into month end, with Ofgem’s energy price cap now expected to rise 20% as a direct result.
- The FTSE 100 gained 1.4% in Q1, one of very few major indices in positive territory, its heavy weighting in oil majors and miners acting as a natural hedge against the energy shock.
Europe
- Iranian missile strikes hit Qatar’s Ras Laffan, the world’s largest LNG export facility, sending European natural gas prices 25% higher to a three-year high above €68/MWh.
- The ECB held rates at 2% in March but strongly signalled it could hike, a dramatic pivot for a region that had been steadily cutting, with its 2026 growth forecast cut to 0.9%.
- Russia’s economy is forecast to grow just 0.8% in 2026 as the dual burden of sanctions and Middle East competition for energy revenues begins to bite.
Asia
- Japan held a snap election in February, won convincingly by Sanae Takaichi and her Liberal Democratic Party, sparking what traders called the ‘Takaichi trade’: Nikkei up, yen down, longer-dated government bonds selling off sharply.
- Japan’s TOPIX was Q1’s best-performing major equity index globally, up 3.6%, driven by yen weakness and optimism about domestic fiscal stimulus under the Takaichi government.
- MSCI China fell 8.94% in Q1, the worst performance among major regional indices, as investors grew impatient with the pace of domestic demand recovery.
North America
- The US and Israel launched ‘Operation Epic Fury’ on Iran on 28th February, so significant it overshadowed the US removal of Venezuelan President Nicolás Maduro earlier in the quarter, itself one of the most consequential geopolitical events in decades.
- Trump nominated Kevin Warsh as the new Fed Chair in late January, with markets interpreting the pick as a signal of future pressure to cut rates more aggressively.
- The Supreme Court struck down the Trump administration’s broad emergency tariff powers in February, only for the White House to announce a flat 10% global tariff replacement within days.
South America
- The US removal of Venezuelan President Nicolás Maduro, with power transferring to Delcy Rodríguez, was one of the most visible US interventions in Latin America in recent history, raising immediate questions about Venezuela’s vast energy reserves.
- Peru’s Congress impeached its interim president in Q1, the sixth head of state removed before completing a term in a single decade, rattling investors at the moment copper and gold prices are at record levels.
- Brazil’s central bank began cutting its 15% policy rate in March, one of the world’s highest, with the easing cycle expected to support a consumer-led recovery ahead of October’s presidential election
Africa
- The Ghana Stock Exchange surged 49% in Q1, crossing 15,000 points for the first time on 10 March, making it Africa’s best-performing major market and one of the top-ranked exchanges globally.
- Nigeria’s President Tinubu wrote a Financial Times op-ed in February calling for Africa to establish its own credit rating agency, arguing the ‘Africa premium’ costs the continent $75 billion a year in excess interest payments.
- The Middle East conflict weakened 29 African currencies simultaneously by late March, while disruptions to Gulf fertiliser supply during the critical March–May planting season raised the risk of reduced crop yields across the continent.
Q1 2026 Performance Review
Unconstrained strategies
Key facts
Mixed returns, with increased volatility reflecting geopolitical developments
Commodities and gold were key contributors, though both experienced sharp intra-period swings
Equity markets were broadly positive overall but retraced earlier gains as the war disrupted the initial rotation
Bonds were weaker as inflation expectations rose, though shorter duration positioning helped limit downside
Key trades: reduced property and infrastructure exposure, increased commodities, and introduced Ruffer Diversified Return for additional defensive resilience
Summary
The Unconstrained strategies delivered a resilient performance during a more volatile quarter, with outcomes reflecting both the early rotation in markets and the subsequent disruption caused by geopolitical events. While headline returns were broadly positive in several areas, the path to those outcomes was far less smooth.
Diversifying assets played a key role, although not without volatility. The L&G All Commodities ETF (+24.5%) was a standout contributor, driven largely by the sharp rise in energy prices following the escalation in the Middle East. Gold also contributed positively overall (+7.7%), but this masks a more turbulent journey, having risen strongly at the start of the year, it fell sharply by around 20% as the conflict initially unfolded, before recovering some ground. This behaviour reinforces its role as a diversifier, albeit one that can be volatile over shorter periods.
Equity markets showed a similar pattern. Early gains, driven by the broadening of market leadership away from the US and large-cap growth stocks, were partially reversed as the war introduced a new source of uncertainty. Regional performance was mixed. The UK held up relatively well, with the iShares UK Equity Index (+2.7%), supported by its higher exposure to energy and commodity-related sectors, which helped it retain much of its earlier gains. Emerging markets (+4.3%) and Asia Pacific (+4.3%) also contributed positively.
In contrast, US equities were weaker overall, particularly within momentum-driven strategies. The iShares MSCI USA Momentum ETF (-3.4%) and Xtrackers MSCI World Momentum ETF (-3.1%) detracted, reflecting the pause in the previously dominant growth-led market leadership. However, exposure to US small caps (+2.8%) and income strategies (+1.8%) provided some offset, highlighting the benefits of maintaining diversification across styles and market segments.
Fixed income returns were generally subdued as bond yields rose in response to increased inflation expectations. However, our focus on shorter-dated government bonds helped to limit losses, with the Invesco UK Gilt 1–5 Year ETF (-0.5%) holding up better than broader duration exposures. Inflation-linked and corporate bond allocations delivered modest positive returns, contributing to overall stability.
Alternative and multi-asset strategies continued to provide valuable diversification. The addition of the Ruffer Diversified Return Fund during the quarter introduces further defensive characteristics to portfolios, while retaining the flexibility to capture opportunities following market dislocations, an approach that is particularly relevant in the current environment.
Portfolio activity during the quarter reflected a continuation of our disciplined approach. We reduced exposure to property and UK infrastructure, both of which can behave like ‘bond proxies’ in rising yield environments, and reallocated capital towards commodities to capture the evolving opportunity set. These changes, alongside the introduction of Ruffer, have further strengthened the balance between resilience and participation within portfolios.
Overall, the Unconstrained strategies remain well positioned. While market leadership has become less predictable and more influenced by geopolitical developments, the combination of diversified equity exposure and purposeful allocations to real assets and defensive strategies has helped to navigate a more complex and volatile period effectively.
| SECTOR | Q1 2026 | 1 year to 31/03/26 | 1 year to 31/03/25 | 1 year to 31/03/24 | 1 year to 31/03/23 | 1 year to 31/03/22 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| IA UK Index Linked Gilts | 0.5% | 2.8% | -8.4% | -7.0% | -27.1% | 3.8% | -7.9% |
| IA £ Corporate Bond | -1.6% | 4.2% | 3.2% | 7.3% | -9.4% | -4.4% | 0.0% |
| IA Property | 0.0% | -0.3% | 1.7% | -1.2% | -10.7% | 10.5% | -0.2% |
| IA UK Equity Income | -1.1% | 15.9% | 7.2% | 7.7% | -0.3% | 10.8% | 8.1% |
| IA UK Smaller Companies | -6.9% | 4.7% | -2.9% | 4.8% | -17.0% | -3.8% | -3.2% |
| IA North America | -3.7% | 10.9% | 2.1% | 25.2% | -4.4% | 15.8% | 9.5% |
| IA Europe Excluding UK | -3.7% | 11.6% | 0.9% | 12.5% | 6.6% | 4.3% | 7.1% |
| IA Japan | 2.9% | 22.8% | -2.2% | 17.5% | 0.4% | -4.5% | 6.3% |
| IA Asia Pacific Excluding Japan | 2.2% | 25.9% | 3.9% | 0.3% | -2.4% | -5.1% | 4.0% |
| IA Global Emerging Markets | 2.5% | 27.0% | 3.0% | 5.9% | -4.4% | -8.7% | 3.9% |
Source: Morningstar in GBP. Net income reinvested. Past performance is not a reliable indicator of future results.
The positioning of our Unconstrained strategies
Cautious
Growth
Balanced
Adventurous
Q1 2026 Performance Review
Ethical strategies
Key facts
More mixed performance across Ethical strategies, reflecting both market volatility and structural constraints within the investment universe
Gold was a key positive contributor, though it experienced significant intra-period volatility
Equity returns were weaker overall, with ESG-screened global and US exposures lagging amid the disruption to early market rotation
Bonds were subdued as inflation expectations rose, with shorter duration positioning helping to limit downside
No portfolio changes during the quarter, with limited scope for additional diversification within ethical mandates, but continued monitoring for future opportunities
Summary
The Ethical strategies experienced a more challenging quarter, with performance reflecting both the volatile market backdrop and the more limited opportunity set available within ethical investing.
As with the Unconstrained portfolios, the quarter was characterised by a sharp shift in market conditions. Early gains driven by a broadening of equity market leadership were partially reversed as geopolitical tensions escalated. However, the absence of exposure to traditional energy sectors, one of the strongest performing areas during the period, was a notable headwind for relative returns.
Gold provided an important offset, with the Royal Mint Physical Gold ETC (+7.7%) contributing positively overall. However, this masks a more volatile path, with strong early gains followed by a sharp decline of around 20% as the conflict initially unfolded, before a partial recovery. Despite this volatility, gold continued to demonstrate its value as a diversifying asset within portfolios.
Equity performance was broadly weaker across regions. Global ESG exposures, including developed world (-4.3%) and US (-5.9%), detracted as the previously dominant growth and momentum styles lost ground. UK equities, represented by the Amundi MSCI UK SRI position, also declined (-5.7%), although to a lesser extent than might have been expected given the strength in energy-related sectors, which are excluded from ethical mandates. Emerging markets (+0.3%) and Asia Pacific (+4.3%) provided some positive contribution, although not enough to offset broader weakness.
Fixed income returns were again subdued, reflecting rising bond yields as inflation expectations increased. Government and green bond exposures were modestly negative, while corporate bond strategies also detracted slightly. Shorter duration positioning helped to reduce the overall impact of rising yields.
Alternative and diversifying options remain more limited within Ethical strategies. Infrastructure exposure (+1.1%) provided some stability, while the Trojan Ethical Fund (-2.4%) reflected its more cautious positioning during a period of equity market weakness.
No changes were made during the quarter. While the recent environment has highlighted the relative limitations of ethical mandates, particularly in accessing certain diversifying assets such as energy and broad commodities, we remain comfortable that portfolios are positioned appropriately. We continue to monitor developments closely and will seek to introduce additional sources of diversification where suitable options emerge.
Overall, performance was in line with expectations and strategies remain well diversified within their defined universe. While short-term performance may diverge from unconstrained approaches in certain environments, the long-term investment philosophy and disciplined process remain unchanged.
| SECTOR | Q1 2026 | 1 year to 31/03/26 | 1 year to 31/03/25 | 1 year to 31/03/24 | 1 year to 31/03/23 | 1 year to 31/03/22 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| Global Sustainable | -3.1% | 9.9% | 1.0% | 17.9% | -1.4% | 10.5% | 7.3% |
| UK ESG Enhanced | -0.2% | 14.8% | 11.4% | 9.7% | 3.2% | 10.6% | 9.9% |
| US ESG Enhanced | -3.2% | 13.9% | 5.4% | 27.1% | -3.0% | 19.1% | 12.0% |
| Developed Market Europe Sustainable | -1.3% | 14.4% | 2.5% | 11.9% | 4.1% | 8.2% | 8.1% |
| Emerging Market ESG Enhanced | 0.6% | 22.8% | 0.0% | 5.3% | -7.9% | -7.1% | 2.1% |
| UK Corporate Bond Sustainable | -2.1% | 4.3% | 1.5% | 6.9% | -12.6% | -5.4% | -1.4% |
| Global Corporate Bond Sustainable | 0.7% | 3.4% | 2.2% | 2.4% | -1.5% | -1.9% | 0.9% |
| Global Green Bond | -0.3% | 5.2% | 0.2% | 2.2% | -7.0% | -6.2% | -1.3% |
| Global Renewable Energy | 4.5% | 26.8% | -3.1% | 0.1% | 3.3% | 7.1% | 6.4% |
Source: Morningstar sustainable indices in GBP. Net income reinvested. Past performance is not a reliable indicator of future results.
The positioning of our Ethical strategies
Cautious
Growth
Balanced
Adventurous
Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.