Monthly Market Commentary – by Oliver Harwood – Quilter Cheviot

Global stock and bond markets have declined since the outbreak of war in the Middle East, though the sell-off has been orderly. The MSCI AC World Index ended Q1 down 1.2% (total return, sterling) while US Treasuries returned 2.1%, helped by a 2.0% depreciation in the GBP/USD rate.

We welcome the recent efforts to broker a ceasefire and hope that it paves the way for a durable peace deal. Markets reacted positively to the news, with stocks and bonds moving higher in response. In recent days there has been a clear de-escalatory narrative between both sides, but the situation remains fragile. Even if the peace deal lasts oil and gas supplies could take a while to return to pre-war levels and that could have knock-on effects for inflation and economic growth.

What to watch

We remain focused on the potential length and scale of the energy shock, and what it could mean for global growth and inflation. Key indicators we are monitoring:

• Oil and gas prices: Elevated but still below 2022 peaks. The higher they go—and the longer they stay high—the greater the likely drag on growth and the boost to inflation.
• Energy supply issues: Capacity constraints have reduced output and temporarily closed refineries. Around 10% of global oil production (10m barrels/day) had ceased by 12 March, according to the International Energy Agency (IEA), and it may take six months or more for Gulf flows to return to pre-war levels. Damage to infrastructure could prolong disruption; for example, an attack on Qatar’s South Pars LNG facility reportedly removed up to 17% of capacity for three to five years.
• Responses: The IEA and member countries have agreed to release 400m barrels from strategic reserves (the largest on record), and we are monitoring whether further releases follow. We are also watching for political “offramps” and signals that leaders are seeking de-escalation. The two-week ceasefire brokered by Pakistan that was announced on 7 April is the clearest sign yet that the warring countries are willing to cease hostilities.

Positive UK equity returns

Despite the conflict and a 6.6% decline in March, the MSCI UK index ended Q1 up 2.9%. Energy stocks (over 10% of the index) provided support and the sector is up 35% for Q1.

Europe, as a net energy importer, is more exposed to higher prices: the MSCI Europe ex UK fell 8.7% in March, leaving Q1 at -2.1%. The MSCI North America declined 3.2% in March; for Q1 the US market lagged UK and Europe, falling 2.5%.

Alongside geopolitics, investor sentiment has also been influenced by concerns about artificial intelligence (AI). February saw sharp negative share-price reactions to perceived AI disruption risks across several industries. While those worries have faded amid the conflict, they could return quickly if geopolitical risks ease.

Gilts dip and Treasuries pull back on inflation concerns

Rising energy prices have weighed on bonds. Derivatives markets now price a year-end BoE base rate above 4.25% (versus 3.75% currently); before the war, expectations were for cuts to ~3.25% by the end of 2026. Ten-year gilt yields are close to 5%, the highest since 2008. Short-dated gilts have held up better: 0–5yr gilts returned -0.4% versus -4.1% for 15yr+ gilts.

Across the pond, derivatives markets now price an unchanged year-end Fed Funds rate of 3.50%-3.75%. Before the war, expectations were for cuts to 3.0%-3.25% by the end of 2026. The shift in expectations reflects renewed inflation concerns and recent comments from rate setters at both the BoE and Fed.

So far, markets have focused on inflation, but persistent high energy prices would also be expected to weigh on growth, which could provide some offsetting support to bonds. Historically, this push-pull has sometimes led central banks to “look through” energy shocks, judging that tighter policy to curb inflation may be partly offset by the need to support weaker growth.

Conclusion

The war in the Middle East has delivered a negative shock to markets; the longer the energy disruption persists, the greater the likely hit to growth and the upward pressure on inflation. Even so, despite a difficult March and persistent negative headlines, global stocks ended Q1 only marginally lower. A higher oil price is typically a headwind for equities, but there have been periods with Brent above US$100/barrel in which stocks performed well. Compared with the tariff led sell-off in April 2025 (shorter and sharper), recent price action has been more measured—perhaps reflecting the view that risks could unwind quickly if a resolution emerges.

Diversification can help manage risk in volatile periods. UK equities delivered a positive Q1 return while European and US equities fell. Treasuries were positive and higher starting yields provide a cushion, and yields would need to rise significantly further for investors to lose money by year end.

Periods like these are uncomfortable but not unusual. In 15 of the last 25 calendar years, the MSCI All Country World Index experienced an intra-year decline of more than 10%, yet only three times did it finish the year down 10% or more. Volatility is the price of admission for historically higher long-run equity returns.

Markets have historically ultimately recovered from major shocks including wars, financial crises and pandemics. History suggests that focusing on fundamentals and sticking to an investment strategy aligned to risk tolerance and time horizon remains the most reliable approach. I believe this applies to the current crisis as well.