15.04.26

Q1 2026 Investment Update

The opening quarter of the year presented investors with a rapidly shifting landscape, as early optimism driven by easing inflation and supportive monetary expectations gave way to heightened uncertainty amid escalating geopolitical tensions. Market performance reflected this sharp change in sentiment, with strong thematic drivers such as defence spending, artificial intelligence investment and commodity demand initially underpinning returns, before a broad-based sell-off emerged in response to a significant global energy shock. Against this backdrop, our Chief Investment Officer, Jeff Brummette, provides a concise summary of the key developments, highlighting the evolving macroeconomic environment and the implications for asset allocation across regions and sectors.

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The first quarter of this year can be split into two distinct phases. January and February were characterised by broadly positive sentiment towards risk assets as inflation continued to moderate, resulting in expectations of further rate cuts by central banks. March saw a sharp reversal of this trend, with the war in Iran driving energy prices significantly higher. This triggered an indiscriminate sell-off in risk assets, compounded by a rise in bond yields as market expectations moved from rate cuts to the prospect of rate hikes.

 

Equity Markets

Index returns are in local currency terms except where noted

Source: Bloomberg

 

Fixed Income Markets

Source: Bloomberg

 

Alternative Investments Markets

Commodity returns are versus the U.S. dollar

Source: Bloomberg

 

Currency Rates

Exchange rate changes are versus the U.S. dollar 

Source: Bloomberg

The investment trends that dominated 2025 continued into the new year and drove performance in the first two months. European defence stocks, and the defence sector more broadly, had a strong start to the year, supported by renewed focus on military spending after President Trump launched renewed criticism of NATO and threatened to annex Greenland. This reinforced the view that Europe needs to materially strengthen its defence capabilities.

 

Germany Is Ramping Up Defence Spending

Source: German Government via Bloomberg

AI-related capex expenditure and continued enthusiasm around long-term AI adoption remained key drivers of equity returns. However, performance dispersion amongst the participants in this field has widened. Nvidia, which has been the standout performer in recent years, has been broadly flat over the past six months, while a number of other companies have delivered strong gains. Samsung has emerged as a notable chip maker that may provide an alternative (or maybe just a complement) to Nvidia’s product suite. At the same time, investor sentiment has cooled towards Microsoft’s AI offering, with growing optimism instead directed at Alphabet’s and Meta’s AI products.

 

Hyperscaler Capex Explodes Higher

Note: Capex based on fiscal year-ends, December (AMZN, GOOGL, META), June (MSFT)

Source: Bloomberg

There were some notable underperformers in the software-as-a-service sector, as concerns grew that some business models could be disrupted by the emergence of AI agents. Similar weakness was seen across a range of white-collar professional services, including real estate, financial services and consulting.

 

AI Winners & AI Losers 2026

Source: Bloomberg

The AI churn in the U.S. markets did not adversely impact non-U.S. markets. Europe continued to benefit from the surge in defence spending across the EU and from Germany’s substantial infrastructure programme. In the UK, higher commodity prices have been a supportive tailwind for the FTSE 100, reflecting that market’s exposure to global mining groups and major oil producers. Japan also delivered notably strong performance following the decisive election victory of Prime Minister Takaichi and the Liberal Democratic Party, which now holds a commanding super majority in the lower house. The prime minister has pledged to pursue “a responsible and proactive fiscal policy”, committing to “wise spending” with a longer-term focus, rather than short-term deficit-driven stimulus. She has also signalled support for reducing or eliminating the consumption tax on food and other essential items to alleviate Japan’s post-pandemic affordability crisis.

Closely linked to the expansion of AI is the growing demand for electricity. The need to upgrade and expand power grids globally has led to a surge in copper and silver prices, along with several other industrial metals. This, in turn, has supported the share prices of the commodity miners which have featured in our holdings.

 

AI Expected To Drive U.S. Power Demand Growth to 2035

Source: Bloomberg

Once the war with Iran began on 28 February, none of these factors seemed to matter. Asset prices tumbled sharply in response to soaring energy prices, with virtually all sectors except energy declining during March. There were no meaningful safe havens, as mega-cap technology, healthcare, consumer staples, and even defence and gold all posted negative returns for the month.

The U.S. and Israeli military action against Iran has significantly disrupted the global energy markets. While the military campaign has successfully destroyed much of Iran’s conventional forces and achieved air superiority, Iran retains the ability to threaten shipping in the Strait of Hormuz. In addition, Iran has also attacked the energy assets of the Gulf states, damaging key oil and natural gas facilities. As a result, the Strait of Hormuz has effectively been closed, disrupting the transport of nearly one fifth of the global daily oil supply. In response, oil prices have almost doubled, with particularly sharp increases in diesel, jet fuel and petrol.

 

Oil Price

Source: Bloomberg Finance L.P.

Oil Price Is Lagging The Cost of Petroleum Refined Products

Note: Data is normalised with percentage appreciation as of December 31, 2025

Source: Bloomberg Finance L.P.

President Trump has yet to articulate a clear strategic objective for the conflict. There may have been an expectation of a quick Venezuela type outcome, with regime change and a submissive new government. Instead, the conflict has triggered a significant global energy supply shock, which is still in its early stages of impacting global growth and inflation. Late in the quarter, preliminary negotiations began, reportedly facilitated by Pakistan, although the two parties remain far apart. While the U.S. administration focused on securing a “deal”, the Iranian regime is fighting for its very existence. Absent the total destruction of the Iranian Republican Guard Corps and their stockpile of missiles and drones, it is difficult to see the Strait of Hormuz being regarded as a safe and reliable route for energy exports. Although Saudi Arabia is able to divert some oil exports via pipelines to the Red Sea, current capacity is limited to around five million barrels per day, compared with the roughly nineteen million barrels that typically transit the Strait. Any material expansion of alternative export routes would take years to deliver.

 

Closed and Operating Pipelines

Source: ACLED

The challenge posed by supply shocks extends beyond higher prices to the risk of outright shortages. In some cases, countries and industries may be unable to obtain oil or refined products in the quantities they need at any price. In parts of Asia, measures have already been introduced, including reduced working weeks and rationing of petrol and other fuels. For the health of the global economy, it is critical that the conflict is brought to an end and full, safe passage through the Strait is restored for all vessels.

Over the past year, we have consistently emphasised several key investment themes namely defence, technology, energy infrastructure, commodities such as gold, mining and financials. More recently, we have added selective exposure to oil and gas within portfolios to reflect the changing supply-demand dynamics.

It is reasonable to expect defence spending will continue to grow, not only in Europe but globally. In the United States, President Trump is currently seeking an additional $200 billion in defence funding for 2026, on top of an existing budget of around $900 billion, alongside proposals for c.$1.5 trillion in fiscal 2027.

Technology investment is approaching a similar scale, with mega-cap technology companies expected to spend over $600 billion this year. The rapid expansion of AI data centres is driving a sharp increase in electricity demand, with utility firms and governments working alongside the tech sector to expand capacity, much of if funded by private capital. This level of investment requires vast quantities of raw materials, particularly copper. Given developments in the Gulf, it is likely that investment in fossil fuel will increase as well.

At the same time, government deficits are set to widen as higher defence spending coincides with potential fiscal support aimed at cushioning economies from elevated energy costs. In this environment, we remain cautious on long-duration fixed income, although this view could change if were to see a marked slowdown on global economic growth. Until there is a cessation of hostilities and shipping activity through the Strait of Hormuz markets increases meaningfully, financial markets are likely to remain exceptionally volatile.

 

The price and value of investments and any income that might accrue may fall as well as rise and is not guaranteed. You may not get back the amount of your original investment.

 

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Hear more from the Oakglen experts

Our investment team continue to provide interesting and informative content to help keep you in the loop on recent global news and market trends. See below for some key highlights from around the world which our Chief Investment Officer, Jeff Brummette, has also recently covered:

 

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