Market & Strategy Update - Q2 2026
- Mar 26
- 4 min read
In the latest edition of our Quarterly Market & Strategy Update:
Executive summary
Economy
The goldilocks environment of early 2026 has been upended by the significant rise in energy prices resulting from the Iran war. Every passing day without a resolution increases the odds of an inflationary bust, i.e. slowing growth and rising inflation. While every economy is set to be affected if the situation persists, net importers of energy with limited reserves will be affected the most. The US should fare relatively better, while Europe and many Asian countries appear particularly fragile. Central banks could face a difficult equation, with rising inflation and slowing growth, particularly as governments around the world attempt to limit the impact of higher energy prices with subsidies, keeping fiscal deficits elevated.
Equities
Investors were heavily positioned for a continuation of the goldilocks environment, with evidence of excessive risk taking across all market participants right as the war began. Equity markets have started pricing in the rising risks of an inflationary bust, but neither positioning nor valuations suggest that investors should increase their exposure at this stage, particularly when considering that earnings estimates have not yet been revised down. The strategy of early 2026 should be completely shifted; namely, investors should favour US equities over international equities and avoid heavy exposure to cyclicals. Certain sectors with specific structural tailwinds should be monitored for entry points on signs of major capitulation. In the meantime, energy is likely to be centre stage for equity investors.
Bonds
The combination of rising inflation risks, rising government deficits and expectations of tighter monetary policy have pushed global bond yields higher, providing another instance where DM bonds have failed to act as a hedge against equity weakness. The rise in EU & US short-term yields should be taken advantage of by increasing duration up to 3 years. While evidence of economic deceleration could end up weighing on yields, duration should still be avoided. Credit spreads have justifiably widened but remain unattractive. Emerging market debt is also at risk in the short-term, as many EM governments might raise fiscal spending to support consumption; investors should look for opportunities in the coming weeks and favour debt from commodity exporting countries.
Currencies
Dollar strength is likely to persist as long as this conflict lasts, particularly given the prevailing USD bearishness of early 2026.
Commodities
Energy prices have risen sharply given the disruptions of the Hormuz Strait. Further increases in prices should be expected without an imminent resolution. The inflationary environment will keep favouring commodities, even with a growth slowdown. Investors should remain exposed to energy, look to buy the dip in some industrial metals and get exposure to agricultural commodities as a hedge.
Precious metals
Gold has seen a speculative climax in early 2026 which warranted short-term caution. The material correction seen since has cleared out excessive positioning and should be taken advantage of given the rising odds of an inflationary bust.
To read our complete Market & Strategy Update for this quarter
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