Quarterly Investment Review: Q1 2026

The modern world feels dominated by fast‑moving, futuristic themes such as artificial intelligence and electrification. Yet these remain inextricably grounded in the realities of the physical world, reliant on steady access to energy and basic materials. Recent events in the Middle East further reinforced these connections, and the fragile nature of the just-in-time supply chains underpinning the global economy.

Market review

The quarter unfolded in two clear phases. January and February were relatively constructive, supported by resilient US economic growth, steady corporate earnings expectations and improving sentiment. Global equity markets moved higher, led by energy, materials, industrials – sectors benefitting from improving data and ongoing investment in areas such as energy transition, defence and infrastructure. Technology lagged, reflecting concerns around AI‑driven disruption to software business models and falling free cashflow among the tech giants, as investment spending surged.

The tone shifted sharply and abruptly on February 28th following US-Israel strikes on Iran, with March dominated by surging energy prices, rising uncertainty, and renewed concerns around inflation and supply chains. For the quarter as a whole, developed market equities were down circa 3-4%, despite a final day bounce. European and Asian markets, which had started the year strongly, reversed more sharply as energy import concerns increased, while emerging markets finished broadly flat after outperforming earlier in the period.

As the US-Iran conflict escalated and the Hormuz Strait was effectively closed in March, energy prices rose sharply, with Brent crude briefly touching $120 per barrel before settling above $100, and US gasoline prices spiking from $3 to $4 per gallon, the highest levels since 2022. Gold surged nearly 30% early in the quarter before correcting sharply amid liquidity pressures. In fixed income, yields rose significantly, with US Treasuries and UK Gilts ending at 4.32% and 4.92% respectively, reflecting a shift in central bank expectations from rate cuts to a more hawkish stance.

Strategy performance

Against this volatile and challenging backdrop, our portfolios again delivered robust performance in Q1, with our balanced and growth Responsible strategies and our Sustainable Growth mandate all significantly ahead of corresponding ARC Private Client Indices.

Performance was supported by strong participation during the more constructive conditions of January and February, particularly from energy, materials, infrastructure and international equities. As market sentiment became more stretched, we took profits in some leading areas and modestly reduced equity risk. These adjustments, alongside our energy equity exposure, helped limit downside during the ‘risk-off’ conditions in March.

Macro outlook

The US-Iran conflict and the status of the Strait of Hormuz are now central to the macro outlook. The immediate impact is a meaningful energy shock, while secondary effects include rising inflation, supply chain disruptions, and risks to global growth particularly in Europe and Asia.

Central banks face a dilemma: rising inflation alongside weakening labour markets. Rate hikes risk exacerbating recessionary pressures, while easing risks embedding inflation. We believe a “data dependent” pause is the most likely near-term response.

While risks are elevated, there are strong incentives for de-escalation. Policy responses, particularly in the US, may include stimulus if conditions deteriorate. Over the longer term, we expect structurally higher inflation and financial repression, favouring equities and real assets over cash and bonds.

Positioning

Our portfolios entered the quarter positioned with resilience firmly in mind. We remain underweight US equities on valuation grounds, with risk spread across regions, sectors and styles. Exposure to real assets such as energy, materials and infrastructure continues to play an important role, alongside elevated cash levels that provide stability and flexibility.

We have reduced exposure to regions more sensitive to energy costs, while remaining ready to deploy capital selectively as opportunities emerge. When adding risk, this may include greater exposure to the US, which remains relatively sheltered compared with other major economies.

Key risks include the potential for inflation to inflect higher, signs of stress within private credit, and the possibility of the AI build-out stalling at some stage. These risks are closely monitored and actively reflected in portfolio construction.

Final thoughts

The global environment continues to shift toward fragmentation and geopolitical tension. While uncertainty remains high, portfolios are positioned with resilience and flexibility, giving participation to the upside while helping to protect against downside risks. We are closely monitoring developments and stand ready to act.

While short‑term uncertainty can feel uncomfortable, maintaining a disciplined, long‑term approach has consistently proven to be the most reliable way to protect and grow wealth. We are pleased to report another quarter of strong relative performance and remain focused on navigating the months ahead with care, patience and conviction on behalf of our clients.

The views, thoughts and opinions expressed within this article are those of the author, and not those of Capital International Group Limited (Group) and/or any of its subsidiary companies and as such are neither given nor endorsed by the Group or any company within the Group. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Group to buy or sell any product or security or to make a bank deposit. Any reference to past performance is not necessarily a guide to the future. The value of investments may go down as well as up and may be adversely affected by currency fluctuations. The Group, its subsidiary companies, clients, and officers may have a position in, or engage in transactions in any of the investments mentioned. Opinions constitute views as at the date of issue thereof and are subject to change.