Introduction
This commentary covers market developments during Q1 2026 (January-March). There was mixed performance from global equity markets in the opening three months of 2026. The start of the year saw most markets rise, but the conflict in the Middle East resulted in March seeing a sharp increase in volatility and declines in global indices. The war in the Middle East had a significant impact on oil and gas supply, with the oil price rising sharply. Government bonds were not immune to the sell-off as fears over higher inflation offset weaker economic growth prospects.
From an economic point of view, the Bank of England kept its interest rate on hold at 3.75% at its February meeting with expectations for the next move to be a further reduction, but at the March meeting policymakers indicated they were “ready to act” to see off inflationary risks from the Middle East war, suggesting there could now be increases later in the year. Data showed UK economic growth remained weak, with GDP rising by 0.1% in the fourth quarter of last year. Prior to the start of the Middle East conflict, UK inflation had continued to decline, with headline CPI falling to 3% in January and holding at this level in February. The US Federal Reserve left its interest rate unchanged, but at the March meeting it maintained its outlook for one rate cut this year. The federal government shutdown contributed to US economic growth slowing in Q4 to an annualised rate of 0.7% from 4.4% in the previous period. The European Central Bank also left its interest rate unchanged, but the President Christine Lagarde said rates could be raised “at any meeting” if higher energy prices risk a jump in inflation.
Market Performance
CR = Capital return; LC = Local currency
Source: Lipper for Investment Management
Past performance is not a reliable indicator of future performance
UK Equities
There was mixed performance from UK equities in the first quarter, with the large cap FTSE 100 strongly outperforming the mid cap FTSE 250. The FTSE 100 started the year with gains, whilst the relatively large weighting of the energy sector benefited from the higher oil and gas prices in March, whilst there was also support from defence stocks and the weaker sterling, enabling the index to still record a gain over the quarter. However, the more domestically focussed FTSE 250 has far less exposure to energy and defence stocks and its greater weighting in cyclical domestic sectors suffered during the sell-off in March, resulting in a loss despite having risen in the first two months.
Global Equities
The US S&P 500 (which measures 500 of the largest US companies), suffered a loss in Q1 as it underperformed other developed markets. The US saw significant volatility, as having reached a record high early in the year, concerns arose that interest rate cuts could be delayed whilst the geopolitical events at the end of February weighed heavily on investor sentiment. There was also a headwind from certain IT-related stocks, which fell amid concerns over the impact of AI on selected sectors such as software. Having started the year positively, the FTSE World Europe ex UK Index (which measures large and mid cap stocks across Europe) ended the quarter lower due to the declines that followed the outbreak of the conflict Middle East. The Japanese Nikkei 225 Index (a measure of Japan’s top 225 companies) outperformed as it recorded a gain, with strong performance in the first two months offsetting the sharp decline in March. There was notably strong performance in February after the landslide victory for the LDP in the election which boosted optimism over political stability and pro-growth policies.
Asia and Global Emerging Markets Equities
Despite the sell-off in March, Asian and Global Emerging Markets produced gains in Q1, outperforming most developed markets. Both the MSCI Asia ex Japan Index (which captures the performance of over 1,000 companies across Asia) and the MSCI Emerging Markets Index (which covers over 1,200 stocks from across 24 emerging markets countries), finished higher. The large technology-driven markets of South Korea and Taiwan were key drivers of returns in the opening months, although they did suffer in the March sell-off due to their reliance on energy imports. In particular, the South Korean index suffered a significant fall but the previous strong performance meant it still ended the quarter with a positive return. Latin American indices performed well, but China underperformed amid slow domestic growth and weak export demand.
Fixed Income
Government bonds also fell in Q1 as yields rose (bond prices and yields have an inverse relationship), although the conflict in Iran saw some divergence in the degree of losses in March. The FTSE Actuaries UK Conventional Gilts Index underperformed, as investors moved from expecting a rate cut to potential increases amid concerns over the inflationary impact of the sharp rise in energy prices. European government bonds also declined, with the focus again on worries over more persistent inflation. However, US treasuries proved more resilient as their yields rose to a lesser extent over the quarter, supported by anticipation of interest rate cuts later in the year after signs of labour market weakness prior to the start of the conflict.
AFP264 Exp:04/2027
Home > Market Commentary – Quarter 1, 2026
Market Commentary – Quarter 1, 2026
Introduction
This commentary covers market developments during Q1 2026 (January-March). There was mixed performance from global equity markets in the opening three months of 2026. The start of the year saw most markets rise, but the conflict in the Middle East resulted in March seeing a sharp increase in volatility and declines in global indices. The war in the Middle East had a significant impact on oil and gas supply, with the oil price rising sharply. Government bonds were not immune to the sell-off as fears over higher inflation offset weaker economic growth prospects.
From an economic point of view, the Bank of England kept its interest rate on hold at 3.75% at its February meeting with expectations for the next move to be a further reduction, but at the March meeting policymakers indicated they were “ready to act” to see off inflationary risks from the Middle East war, suggesting there could now be increases later in the year. Data showed UK economic growth remained weak, with GDP rising by 0.1% in the fourth quarter of last year. Prior to the start of the Middle East conflict, UK inflation had continued to decline, with headline CPI falling to 3% in January and holding at this level in February. The US Federal Reserve left its interest rate unchanged, but at the March meeting it maintained its outlook for one rate cut this year. The federal government shutdown contributed to US economic growth slowing in Q4 to an annualised rate of 0.7% from 4.4% in the previous period. The European Central Bank also left its interest rate unchanged, but the President Christine Lagarde said rates could be raised “at any meeting” if higher energy prices risk a jump in inflation.
Market Performance
CR = Capital return; LC = Local currency
Source: Lipper for Investment Management
Past performance is not a reliable indicator of future performance
UK Equities
There was mixed performance from UK equities in the first quarter, with the large cap FTSE 100 strongly outperforming the mid cap FTSE 250. The FTSE 100 started the year with gains, whilst the relatively large weighting of the energy sector benefited from the higher oil and gas prices in March, whilst there was also support from defence stocks and the weaker sterling, enabling the index to still record a gain over the quarter. However, the more domestically focussed FTSE 250 has far less exposure to energy and defence stocks and its greater weighting in cyclical domestic sectors suffered during the sell-off in March, resulting in a loss despite having risen in the first two months.
Global Equities
The US S&P 500 (which measures 500 of the largest US companies), suffered a loss in Q1 as it underperformed other developed markets. The US saw significant volatility, as having reached a record high early in the year, concerns arose that interest rate cuts could be delayed whilst the geopolitical events at the end of February weighed heavily on investor sentiment. There was also a headwind from certain IT-related stocks, which fell amid concerns over the impact of AI on selected sectors such as software. Having started the year positively, the FTSE World Europe ex UK Index (which measures large and mid cap stocks across Europe) ended the quarter lower due to the declines that followed the outbreak of the conflict Middle East. The Japanese Nikkei 225 Index (a measure of Japan’s top 225 companies) outperformed as it recorded a gain, with strong performance in the first two months offsetting the sharp decline in March. There was notably strong performance in February after the landslide victory for the LDP in the election which boosted optimism over political stability and pro-growth policies.
Asia and Global Emerging Markets Equities
Despite the sell-off in March, Asian and Global Emerging Markets produced gains in Q1, outperforming most developed markets. Both the MSCI Asia ex Japan Index (which captures the performance of over 1,000 companies across Asia) and the MSCI Emerging Markets Index (which covers over 1,200 stocks from across 24 emerging markets countries), finished higher. The large technology-driven markets of South Korea and Taiwan were key drivers of returns in the opening months, although they did suffer in the March sell-off due to their reliance on energy imports. In particular, the South Korean index suffered a significant fall but the previous strong performance meant it still ended the quarter with a positive return. Latin American indices performed well, but China underperformed amid slow domestic growth and weak export demand.
Fixed Income
Government bonds also fell in Q1 as yields rose (bond prices and yields have an inverse relationship), although the conflict in Iran saw some divergence in the degree of losses in March. The FTSE Actuaries UK Conventional Gilts Index underperformed, as investors moved from expecting a rate cut to potential increases amid concerns over the inflationary impact of the sharp rise in energy prices. European government bonds also declined, with the focus again on worries over more persistent inflation. However, US treasuries proved more resilient as their yields rose to a lesser extent over the quarter, supported by anticipation of interest rate cuts later in the year after signs of labour market weakness prior to the start of the conflict.
AFP264 Exp:04/2027
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