Investment review: a short briefing on the first quarter of 2026

The financial markets ended 2025 on a high, investors full of optimism. The first quarter of 2026 saw a shift in sentiment due to the escalation of tensions in the Middle East. Yet, markets have held up relatively well following significant gains over the past 12 months.

A constructive start to the year, supported by resilient growth and easing inflation pressures, gave way to increased volatility after the US and Israel launched strikes on Iran on 28 February. Energy prices rose sharply, giving rise to concern over inflation and investors were reminded of the importance of diversification and taking a long‑term view.

This short update is designed to give clients — and those considering our discretionary investment services — a clear sense of how we interpret current market conditions and how portfolios are positioned in response.

Q1 2026: key themes

Geopolitical risk returned to the forefront

The escalation of conflict involving Iran prompted a rapid reassessment of geopolitical risk, particularly through its impact on global energy markets. While uncertainty remains elevated, markets are currently pricing a scenario of sustained but manageable energy price pressures rather than a severe global supply shock.

Growth remains resilient, but inflation risks have increased

Prior to the escalation, economic data pointed to continued global expansion rather than recession. That underlying momentum has not disappeared, but higher energy costs have complicated the inflation outlook. This is particularly true for the UK, where wholesale price movements feed quickly into the domestic economy.

Central banks adopted a more cautious stance

Interest rate cuts in the coming months had been widely anticipated, but this first quarter has seen a rapid reassessment. The Bank of England, like its peers, has emphasised the risk that external price shocks — particularly energy prices — could put pressure on inflation.

What’s happening across the markets?

Headline market performance over the quarter reflected this more uncertain backdrop:

• Global equities were broadly flat to modestly positive in sterling terms, with early gains offset by late‑quarter volatility.
• UK equities were relatively resilient, supported by energy exposure and attractive starting valuations.
• US equities continued to benefit from strong corporate earnings and ongoing investment in artificial intelligence.
• UK government bonds faced pressure as inflation expectations rose, particularly at longer maturities.
• Cash continued to offer a positive nominal return, providing stability and flexibility within portfolios.

While short-term performance varied, diversification across asset classes helped limit overall drawdowns during the period.

What this means for investors

Periods like Q1 2026 underline several core principles that guide our discretionary investment approach:

• Diversification remains essential — holding a broad mix of assets helps manage risk when markets are unsettled.
• Equities remain central to long‑term returns — despite short‑term volatility, equities continue to offer the most effective protection against inflation over time.
• Fixed income requires selectivity — higher yields have improved long‑term prospects, but managing interest rate risk remains important.
• Cash is a tool, not a destination — useful for stability and flexibility, but not a long‑term solution in real terms.
• Real assets enhance resilience — infrastructure and similar assets can provide diversification and inflation‑linked income.

Our focus remains on maintaining discipline, avoiding reactive decisions and ensuring portfolios stay aligned with clients’ long-term objectives.

A positive start to the next quarter

Since the start of April, financial markets have stabilised somewhat, with equities edging back upwards, though not all reaching the highs seen earlier in the year. With continued uncertainty around Iran, investors remain sensitive to geopolitical developments and inflation.

US equities continue to lead performance, while UK equities have been more mixed but remain supported by their exposure to energy and commodities — which have fared well amid continued tensions in the Middle East.

Bond markets have experienced a more uneven start to the quarter. Yields initially remained elevated as investors reconsidered the timing of possible interest rate cuts. However, there have been signs of stabilisation more recently.

Our outlook

While uncertainty remains elevated for now, we are cautiously optimistic about medium to long-term market outcomes. The global economy entered this period of stress from a position of relative strength, with healthy corporate balance sheets, ongoing technological investment and continued innovation.

We believe that periods of volatility, while uncomfortable, often create opportunities for long-term investors. Our role is to manage risk carefully, maintain perspective and position portfolios to benefit as conditions evolve.

If you would like to discuss your circumstances or our investment services, please contact us to arrange an obligation-free meeting, or simply book a consultation online.

Important: The content of this bulletin is for general consideration only and does not constitute advice. No action must be taken, or refrained from being taken, without advice. This company accepts no responsibility for any loss occasioned as a result of any such action, or inaction. You are also reminded that investments can fall, as well as rise. And in the event of early encashment, you may receive less back than your original investment.