Sometimes we describe a football or rugby match as a game of two halves; however, in the case of the first quarter, it was more a case of two-thirds/one-third. For the first two months of the year, markets, particularly outside of the US, performed very strongly. This was led by Asia and the UK, as investors looked to diversify away from the US AI infrastructure spending trend, either to access unrelated themes or to access the themes at lower valuations, such as via Korean companies.
Then, unsurprisingly, the Israel/US war against Iran dominated market sentiment during March. The constant flow of news about the conflict initially caused large swings in global indices, but it was the price of crude oil and related energy products that ultimately dictated the extent of that market volatility. The level of impact varied by region. Those markets which are almost wholly reliant on the Gulf for their energy needs were the ones that felt the impact most. However, you might argue that some of these markets, such as Japan and Korea, were at the top end of their range following an extended positive run. The least affected major market was the US, which is not entirely surprising given the country is virtually self-sufficient in many energy products. European markets were impacted as the restriction in supply, particularly natural gas, exacerbated the effects of the region’s attempts to wean itself off Russian supplies. The UK, which is less reliant on the Gulf for its energy supplies, still felt an impact on the stock market, but this also followed a period of strong relative returns. Regardless of your access to supplies, the oil price is set internationally, albeit with regional differences, so no region is totally immune to the effect of a sharp rise.
Higher oil prices mean higher costs for both businesses and consumers. Businesses may be able to pass on these higher costs to consumers through higher prices, or their earnings will suffer. Consumers are then hit by both higher prices for goods or services and higher fuel costs. This can lead to an impact on demand, as a pound extra spent on petrol or diesel is a pound not spent elsewhere by consumers. This creates uncertainty over economic growth and, hence, uneasiness in equity markets.
Central Banks now need to consider how to balance the likely impact of higher oil prices on inflation against a potentially lower growth environment. This has led to speculation that the direction of shortterm interest rates will not be as accommodative as previously thought. There are also concerns about governments’ borrowing costs rising, either due to financing the war itself or through any support provided to consumers. Both scenarios have led to weakness in government debt markets, with bond yields rising steeply and prices falling.
It is also worth reminding ourselves that such stock market volatility is absolutely normal, and a negative start to the year doesn’t necessarily dictate the returns for the entire year. As regular readers will be aware, portfolio asset allocation is designed at the outset to reduce the effects of outlier events such as we are seeing currently. Therefore, portfolio behaviour has been as expected, i.e. the level of impact being commensurate with risk appetite. And, because of the steep rises in January and February, values are only back to, or slightly below, levels seen at the start of the year. Consequently, we are not forced into secondguessing military strategy in the Gulf in terms of portfolio activity. Naturally, human nature means that investors may be concerned about developments, and media speculation can fuel those concerns. Parallels have been drawn with the 1970’s, for instance, but major economies’ consumption of oil has reduced significantly since that time, particularly in the mature economies that have shifted from a manufacturing base to a service industry one. Additionally, we should consider the effects of inflation on the price of oil. In the 1970s, $100 a barrel in real terms was significantly greater than $100 today (think of house prices then and now). So, the impact on economic growth of a $100 oil price today is manageable and estimates currently don’t indicate serious recessions. Meanwhile, we hope for a swift resolution to the war, for humanitarian reasons as much as financial.
Rockhold Asset Management March 2026