Investment commentary – first quarter 2026

The first three months of 2026 proved an extraordinary period for markets, marked by escalating geopolitical conflict and a sharp shift in economic expectations. It felt less like a quarter and more like a year’s worth of events compressed into just a few months.

Markets were first jolted in January by the US capture of Venezuela’s president and a diplomatic clash with Denmark over strategic influence in Greenland. Just as investors began to regain their footing, those developments were swiftly overtaken by the rapid escalation of conflict in the Middle East.

In February, rhetoric against the Iranian regime intensified as Washington prepared for joint US‑Israeli military action. Iran’s swift regional retaliation triggered a widening conflict with major global implications. In the strategically vital Strait of Hormuz, Iranian forces warned that “no ship is allowed to pass”, prompting tanker operators to halt shipments. With 20–30% of the world’s oil and liquefied natural gas flowing through this narrow channel, energy markets reacted sharply. Brent crude oil surged above $100 a barrel for the first time in four years – briefly touching $120 – far above the $60–80 range that has characterised much of the past five years.

As the lifeblood of global economic activity, energy prices quickly became the focal point for investors, with fears growing that the conflict could trigger a “stagflationary” shock – the toxic combination of slowing growth and rising inflation that’s hostile to both equities and bonds.

Commodity volatility

Despite widespread volatility across commodity markets, some of the strongest performances of the quarter came from natural resources. Equities in the energy sector were standout winners as oil and gas prices soared, with major producers such as Shell and BP rising by 25–30%, while smaller producers and explorers typically delivered even stronger gains.

Gold also finished the quarter higher, but not without turbulence. The metal experienced a sharp sell‑off that challenged its reputation as a short‑term “safe haven” asset – something its history shows is far from guaranteed. A strengthening US dollar and rising bond yields weighed heavily on an asset that offers no income and is often sold to raise liquidity during periods of stress. The scale of the decline also reflected profit‑taking following a very strong multi‑year rally.

Other precious metals and industrial commodities, including copper, performed well at the start of the quarter before retreating as concerns mounted that slowing global growth would undermine demand. The prospect of stagflation is particularly unhelpful for industrial metals, which rely on robust economic activity.

Read more: the link between oil and food prices

Energy prices shape equity performance

In equity markets, the most pronounced weakness was seen in countries heavily reliant on energy imports. India and South Korea suffered sharp sell‑offs, although the latter was coming off an exceptionally strong short‑term run. This volatility dulled what had been a strong start to the quarter for Asia and emerging markets more broadly.

Elsewhere, infrastructure assets proved relatively resilient, with investors attracted to the inflation‑linked characteristics of many cash flows across the sector. The US market, which had lagged earlier in the quarter as investors rotated towards cheaper regions, saw a partial reversal of fortunes. US equities, particularly the technology sector, held up comparatively well, reflecting America’s position as a net energy exporter and its potential to avoid the worst of the inflationary fallout from the Middle East crisis.

UK smaller companies were notable casualties of the volatility, as were European equities more generally. By contrast, larger UK stocks proved more resilient thanks to the FTSE 100’s heavy weighting towards defensive and energy‑related sectors. The index reached a new all‑time high towards the end of February, although banks and financial stocks were hit hard during the renewed bout of volatility in March.

Bond markets struggled into the end of the quarter as inflation and interest rate expectations reset sharply higher. Prior to the escalation in the Middle East, markets had been pricing in multiple interest‑rate cuts from both the US Federal Reserve and the Bank of England during 2026. That narrative has now been overturned. With inflation risks rising once again, the prospect of rate cuts has evaporated, and the possibility of hikes has emerged. Bond yields spiked and prices fell, offering little diversification at a time when equity markets were also under pressure.

Don’t make rash decisions in the ‘fog of war’

While recent developments have been troubling for investors, it’s important to emphasise that short-term geopolitical shocks, however dramatic, aren’t unusual. A diversified portfolio – spread across regions, asset classes and sectors – is designed precisely for periods of heightened uncertainty. Diversification reduces reliance on any single market or risk factor and helps cushion the impact of sudden events.

That said, equity markets seem to be pricing a reasonably swift resolution to the conflict. At least in terms of the disruption to energy markets, reflecting the interruptions to supply so far and the consequences for economic growth and company earnings. A more protracted conflict would come as a blow to hopes of an “off-ramp” close at hand and limited economic pain.

We continue to monitor the situation closely and will keep you informed of our views via regular updates on our Insights page. In the meantime, we believe it’s important to put short-term volatility into perspective and stay focused on long-term goals.

Top performing funds 

The energy sector was a standout in the first quarter of 2026 as oil and gas prices soared, but despite the volatility it was also a good period for most of the commodity complex overall.

Bottom performing funds

Markets most exposed to the rising cost of energy such as India and Korea came under pressure towards the end of the quarter.

Top performing sectors

With few safe havens available it was money market fund sectors that provided the most obvious shelter from energy-shock volatility. 

Bottom performing sectors

The prospect of an extended conflict in the Middle East and the impact on energy prices saw most asset classes and sectors fall back sharply.

Source for data: FE Analytics, 31/12/25 to 31/03/26, total returns with income reinvested. Performance is Past performance is not a reliable guide to future returns.