Q1 2026 Market Review

Market Commentary

 Summary

• If the worst-case scenarios in Iran can be avoided, then, as with the tariffs, the global economy should be able to withstand any short term hit from higher oil prices and keep its momentum going into the second half of the year.

 

• Table 1 shows the pre-war (January and February) market winners. A recovering economy should help them to continue to deliver for the rest of 2026.

 

• AI remains the other dominant investment theme and the pace of change is not slowing down. We do not worry about data centre overbuild today. It looks more likely that energy and semi-conductor supply will be the limiting constraints on demand.

 

• This means owning the picks and shovels of the AI boom (including the right energy and semiconductor investments) continues to be the safest way to invest in continued AI growth.

 

• Fixed Income did not prove a safe haven in the US/Iran war. But yields are now higher and, if the ceasefire can hold, the hit to inflation should be lower. We like the investment opportunity in high quality fixed income from here.

 

• Gold was also no safe haven. But Trump is not going anywhere and plenty of countries will continue to want to diversify away from US assets. This should help the gold rally to continue, even if it looks and trades like a risk asset today.

 

• Our other alternative assets did add some stability in a volatile Q1. The inflation linkage of our investment trust assets (including care homes and core infrastructure) meant they performed relatively well on average for the quarter.

 

• And our absolute return investments also gave some protection in what proved to be a tricky March for most asset classes. Given there will no doubt be more surprises on the way, this kind of diversification has value. We may add exposure to this sector if we can find the right opportunity.

 

Iran

It is always difficult to be writing longer term outlook pieces in the middle of Trump headline roulette. As I write (the morning of 8 April, just after the Iran US ceasefire was announced) it looks like there is some runway to a deal that keeps the Strait of Hormuz open. This is unambiguously good news. Even a messy ceasefire with new deadlines and disagreements and (potentially) payments to Iran beats the alternative of escalation and a major disruption to oil and gas production.

 

For longer term investors, the standard playbook for geopolitical shocks in the Middle East has been to ignore them. Over the past 40 years there have been 21 US airstrike campaigns in the Middle East and US equity markets have been higher 8 weeks later 95% of the time[1]. Five weeks in, this time may well prove to be no different. And Chart 1 shows market reactions to selected major recent wars. The S&P 500 was down 8% peak to trough which puts it (so far) pretty much in the middle of the events listed.

 

One reason for this is that although the oil shock has been large (20% of the world’s oil flows through the Strait of Hormuz along with plenty of other critical resources like liquid natural gas and helium) the world is much less dependent on commodities than it was in the 1970s say (see Chart 2). Alan Greenspan once noted that the physical weight of our GDP is probably only slightly higher today than it was 50 or 100 years ago. GDP growth has not come from industrial production recently but from Instagram, Netflix, AI and nail bars. Services such as these do, of course, need some energy and commodities to function. But they are much less resource intensive than industries of the past.

This is part of the reason that the equity market reaction to Iran has been smaller than many would have expected given the size of the oil shock. But there is also the secondary effect to consider: more expensive oil will push inflation and interest rates higher than they otherwise would have been in 2026. This, of course, is an echo of the Trump tariff shock that hit almost a year ago. Here I would note that both the inflationary impact of tariffs and the drag on growth proved to be smaller than many predicted at the time. And I have no reason to think differently this time. The global economy has proved remarkably resilient to shocks recently and it had some decent momentum going into the war. Cyclicals, emerging markets and other growth sensitive sectors did well for the first two months of 2026. If this ceasefire holds, I would expect them to start outperforming again.

 

And one reason to think it might is that Trump needs to bring down oil prices quickly. A man elected to end forever wars in the Middle East and bring down inflation has not been doing a good job of it recently. With mid-term elections coming up in November that needs to change. This pressure raises the probability that the Iran ceasefire will stick.

[1] Source: Goldman Sachs Investment Strategy Group

AI

Outside of a potential pick up in global growth, AI remains the dominant investment theme. It also remains very hard to work out who the AI winners and losers will ultimately be. Part of the reason for this is that the pace of change is not slowing down. Models are always improving. And AI plus physical machines (in the form of self-driving cars or robots) is still at very low (almost zero) market penetration.

One thing that does look clearer to me, however, is that build out of data centres does not look to be overdone. The big 5 hyperscalers (Amazon, Microsoft, Google, Meta, and Apple) are spending $725bn on infrastructure in 2026 alone (up from $450bn in 2025). This growth is a big driver of US economic growth and even US earnings growth (see Chart 3). The worry has been that we are building too much and that we will ultimately (like the railway and fibre-optic booms before us) have a glut of low-returning data centre capacity.

 

But this is a world where there is not enough demand for the capacity being built. This is not the world we live in today. Instead, we have the rise of autonomous agents (which can run models and do your bidding 24/7). One of the major models, Claude, has already had to restrict access to these agents (which are still very much in their infancy). As AI develops, I think the constraint will not be lower than expected demand but the energy and semi-conductors needed to power the seemingly limitless demand for AI compute that exists today. Claude itself went from $1bn of revenue at the end of 2024, to $10bn at the end of 2025 and is on track to do over $100bn in 2026 (see Chart 4). There are plenty of things to worry about with AI but I think data centre supply out-running demand is not one of them. In the short term at least, the ongoing data centre build out is helping support economic growth and equity markets. I would expect this tailwind to continue.

Fixed income

One challenge of the war in Iran, and oil shocks in general, is that fixed income is not a cushion that protects but an amplifier that makes things worse. We remain overweight fixed income which did not help much in March but there are a few reasons why I think this remains the right position looking forward:

 

• If wars remain hard to predict (which, of course, they are) and the right playbook is to look through them (see Chart 1 for example) then, any losses you take after the shock should be recoverable in a few months. I’d hope this is the case this time round.

 

• On the other hand, if this time is different and the Iran conflict grows and creates longer term energy disruptions then oil demand will need to fall to match the new lower supply. Lower oil demand probably means lower growth or even a recession. In this case I think interest rates fall and fixed income investments should provide some meaningful protection.

 

• Finally, and in contrast to the last oil shock in 2022, fixed income yields remain comfortably above today’s inflation rates (and forward-looking market estimates). This higher yield helps cushion any losses, especially when your time horizon expands out to 12 months or more. This is one reason why year-to-date fixed income losses have been much smaller this time around than they were in 2022 for example.

 

So, a fixed income overweight still makes sense to me here. And UK markets are still pricing in one rate rise today, even after the ceasefire announcement, compared to two rate cuts at the end of February. This means there is some more upside to come, I think, if the Strait of Hormuz can stay open and interest rate markets continue to normalise.

 

Alternatives

One positive for our portfolios is that in a quarter where fixed income and equities both had their struggles our alternative assets broadly delivered.

 

Gold proved to be anything but a safe haven asset (moving in line with equities and in the opposite direction to oil all quarter) but it still remains comfortably up for the year. One reason for gold’s recent volatility is that any market which has (like gold) been in an explosive bull market for the last 2 years will inevitably attract plenty of hot money and trend followers. And when the trend breaks they can be quick to take profits and sell. But with some of this money now shaken out I think the fundamentals for the gold bull market remain in place. There are plenty of countries looking at the current US government who will be keen to keep reducing their reliance on US dollars. Gold remains an obvious, attractive and liquid alternative.

 

Elsewhere the inflation linkage of our investment trust assets helped give them some resilience as the oil shock hit. As an example, our UK care home investment receives regular inflation linked lease payments. And our main UK infrastructure investment sees its income rise by around 0.7 times at any surprise rise in inflation. And, of course, the key attraction to both care homes and core infrastructure is that they ultimately have only limited exposure to what is happening in the Middle East. This independence proved its value in Q1.

 

Finally, a word on the absolute return sector. Around 6 years ago we chose to reduce our exposure to absolute return style funds as they had ultimately not delivered on their initial promises. We were not the only ones and there was a large shake out in the sector. It may be that the ones left standing are more resilient and better able to deliver consistent cash plus returns. Our limited absolute return exposure had a good Q1 and (as was the case in 2022) proved a good diversifier in the face of a commodity price shock. Looking at potential new absolute return portfolio additions remains a focus for the investment team for the next few months.

 

Chris Brown

Chief Investment Officer