It’s all change in Q1 as a strong start is derailed by global conflict

Energy security was on the agenda in Eurozone markets too, given that the region is strongly reliant on imported energy. Investors are reassessing the outlook for inflation and the prospect of policy easing by the European Central Bank (ECB), which held interest rates in March.

How did it affect portfolios?

Despite their strong start to the year, global equities finished the quarter down 1.3% in GBP terms, but there were pockets of positivity.

UK equities delivered a solid return of 4.1% for Q1 2026, as measured by the MSCI UK Index. The UK market has a high proportion of Energy, Materials and Utilities companies, which proved resilient over the quarter, and particularly during a period when oil prices climbed.

Japanese equities were also in the black, up 3.4% over the quarter. The market was boosted by domestic factors: expectations of fiscal stimulus, improving corporate governance, and ongoing structural reforms.

Emerging Markets, too, produced a positive performance, delivering 1.7% in GBP terms for the period. A weaker US dollar and greater risk-on sentiment from investors initially helped, but this was tempered by changes to interest rate expectations and a spike in the oil price, alongside country-specific returns.

European equities lagged, seeing a 2.1% drop over the quarter. Improving business confidence and resilient labour markets at the start of the year were later offset by concerns about inflation and energy security. 

Q1 was a volatile period for fixed income markets, with expectations of easing inflation and interest rate cuts flipped on their head. Global treasury markets, in pound sterling terms, lost 0.3% over the quarter. 

Corporate bonds performed broadly in line with government bonds, with the Bloomberg Global Aggregate Index returning 0.2%. Higher-yielding corporate bonds did better, returning 0.9%, while emerging market debt was down 1.3% as investors turned more cautious. 

In alternative assets, infrastructure (companies that own essential networks like roads, utilities or data centres) performed strongly. These defensive, regulated assets were able to provide stability over the quarter and to benefit from rising prices amid inflation uncertainty and oil supply pressure. 

The overall lesson for investors in Q1 was the importance of diversification. In times of heightened geopolitical uncertainty and changing monetary policy expectations, it pays to have exposure to a broad spectrum of assets.

Our view on the major asset classes

Equities

Overall, we are currently neutral on equities at the present time; the US-Iran conflict has weighed slightly on global returns and increased the differences between countries. Selective investment is key.

Large US technology firms continue to deliver strong earnings, but trade policy and tariff uncertainty remains an issue for some. Meanwhile, supportive monetary and fiscal policy is likely to continue over the next 12 months, which should help to underpin both economic growth and investor confidence, despite the uncertainty. 

In the medium-term we see better value in the US, Japan and Eurozone. 

Government bonds

While we expect the recent energy price rises to be temporary, increased government spending in the US means inflation could remain higher than had previously been expected through 2026, and so too could yields.

But bonds continue to play an important role in a portfolio, providing stability and protection for investors. Overall, we are neutral on government bonds, but we do see selective opportunities in certain markets, such as UK gilts. 

Corporate Bonds

Elevated borrowing has pushed yields on government bonds higher, reducing their appeal, but this has improved the relative attractiveness of corporate bonds, which we believe continue to offer reasonable value.

Investors generally expect companies to remain financially sound, with a low risk of widespread defaults or credit rating downgrades. 

Over a three-to-five-year period, we expect these higher-quality corporate bonds to deliver modestly better returns than government bonds. Higher-yielding bonds may offer stronger returns over time, but will be more sensitive to market conditions, which could mean volatility along the way. 

Real assets

Alternative assets such as listed infrastructure and real estate continue to provide diversification in a portfolio, helping to improve the consistency of returns over time. They bring the benefit of having a differentiated source of return and lower correlation (meaning their movements are driven by different factors) to the rest of the market.

How do we view the portfolio composition going forward?

Having introduced the WTW Global Equity Diversified Index (GEDI) last year, we have now completed a third tranche of investment into it for our Model Portfolio Service (MPS)/Discretionary Fund Management (DFM) portfolios, and a final tranche for the Multi-Asset Funds (MAF). The aim is to build a more diversified, cost-effective core equity exposure. 

In equities, we were focusing on three key regions where we see stronger opportunities: the US, Europe and Japan. In line with this, we have increased our allocations to the US and Europe and maintained our overweight position in Japan, while reducing our exposure to global passive Treasuries. 

Within the MAF funds, we have reduced exposure to long‑dated US Treasuries and reinvested the proceeds into UK Gilts, as well as adding a 1% allocation to gold. 

We also switched from a passive emerging market bond fund to an actively managed alternative from JP Morgan. It’s an area where we believe active management can add value by making selective decisions about where the risks and opportunities are.