MARKET COMMENTARY – APRIL 2026

The first quarter of 2026 proved to be highly eventful for financial markets, shaped by three distinct forces: renewed scrutiny of the returns being generated by artificial intelligence investment, a shift in the global trade and tariff landscape, and a dramatic escalation of geopolitical tensions in the Middle East. Each of these themes drove significant volatility and a marked rotation in market leadership over the period, resulting in a challenging quarter for most asset classes.

Equity markets came under pressure early in the quarter as investors doubted whether the vast sums being committed to artificial intelligence infrastructure would deliver adequate returns. Concerns intensified that next-generation AI capabilities could undermine the software-as-a-service business model, and software stocks fell sharply in the early weeks of the year. The Magnificent Seven technology companies in the US all declined over the quarter, and growth-style stocks fell 8.1%, significantly underperforming value stocks, which ended the period up 2.6%. The tariff environment also shifted materially. Following a US Supreme Court ruling that struck down the use of emergency powers legislation to justify earlier reciprocal tariff measures, the administration moved to implement a flat 10% tariff on all imports, adding a further layer of uncertainty for businesses and investors.

The most consequential development of the quarter, however, came with the outbreak of conflict between the United States, Israel and Iran at the end of February, which intensified sharply through March. Military operations caused significant damage to energy infrastructure in the region and effectively closed the Strait of Hormuz, a critical chokepoint for roughly 20% of global crude oil flows. Brent crude prices surged by around 80% in March alone and the broad Bloomberg Commodity Index advanced 26.9% over the quarter. Beyond energy, grain prices also rose reflecting the importance of the Strait for the passage of commodities critical to food production including fertiliser. The energy shock prompted a sharp reassessment of the inflation and monetary policy outlook across developed markets, and the trades that had been popular earlier in the quarter – including gold and emerging market equities – reversed as the US dollar rallied and risk appetite deteriorated.

In equity markets, developed market equities fell 1.6% (MSCI World) for the quarter. The US S&P 500 declined 2.5%, with the technology sector among the weaker performers despite showing some relative resilience in the early weeks of the conflict as investors sought out higher-quality companies. The UK market was a notable exception among developed markets, with the FTSE All-Share delivering a positive return of 2.4%, supported by its significant exposure to commodity and energy-related sectors and bolstered by the tailwind of a weaker sterling. European equities also struggled, with the MSCI Europe ex-UK index falling 0.8% as rising gas prices raised concerns about the growth outlook for the region. Japanese equities outperformed, with the TOPIX advancing 3.9% over the quarter, supported by the resounding snap election victory of Prime Minister Sanae Takaichi and the expectation of further growth-boosting fiscal stimulus, as well as a weaker yen. Emerging market equities as a whole ended the quarter broadly flat, as strong earlier performance from technology hardware exporters in Taiwan and South Korea was largely offset by pressure from the energy shock and the stronger US dollar.

Fixed income markets experienced a volatile and ultimately difficult quarter, with the picture changing sharply as the conflict escalated. Prior to the outbreak of hostilities, government bond yields had been declining as cooling inflation and growing concerns about AI-driven disruption prompted investors to seek higher-quality assets and price in near-term interest rate cuts from major central banks. This dynamic reversed abruptly as energy prices surged. UK gilts, which had been the top-performing sovereign market earlier in the quarter as evidence of abating price pressures bolstered expectations of near-term interest rate cuts, ended the period as the worst performer among major government bond markets, falling almost 2.0%. Inflation linked gilts made modest gains, however. The Bank of England held the Bank Rate unchanged at 3.75% at its March meeting, but adopted a decisively hawkish tone, with the entire Monetary Policy Committee – including its most dovish members – signalling that rate hikes could become necessary if the energy shock proved persistent. European government bonds declined slightly over the quarter, with the European Central Bank also leaving rates on hold but strongly signalling the possibility of increases, projecting headline inflation of 3.1% year on year in the second quarter. Japanese government bonds also fell as investors positioned for looser fiscal policy ahead of the election and the Bank of Japan indicated greater concern about upside inflation risks. US government bonds (Treasuries) proved relatively resilient, ending the quarter broadly flat, as the United States’ status as a net energy exporter provided some insulation from the commodity shock.

The first quarter of 2026 was a very challenging period for most investors. The sharp and rapid rise in energy prices, and uncertainty over the duration and outcome of the conflict in the Middle East, have created an uncomfortable combination of higher inflation and slowing growth. Central banks have been left with limited room for manoeuvre. In this environment, diversification continues to play a very important role, with exposure to energy, commodities, value-oriented equity sectors and UK large-cap equities faring considerably better than those concentrated in US growth stocks or bonds with longer maturity dates to redemption. Maintaining broad diversification across regions, sectors and asset classes is expected to remain the most effective approach.

Total returns in GBP to 31/03/2026

*February 2026

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

This commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.