Global uncertainty gives way to opportunity in bond and equity markets

At the start of 2026, most investors held an optimistic view of the global economic outlook, anticipating stable growth supported by increased spending on artificial intelligence. 

Inflation was expected to decline further, and central banks around the world were projected to either cut interest rates or keep them steady. 

However, geopolitical developments in Iran have altered this view, introducing new complexities into the macroeconomic and market outlook.

Below we outline our current thinking around global bond and equity markets.

Fixed income: Short-duration and high-yield opportunities

The escalation in Middle East tensions has caused severe disruptions in global energy markets, primarily through increased oil and natural gas prices. As energy costs rise, inflation in advanced economies is expected to accelerate, with recent data from Europe confirming inflationary pressures in March. This situation has prompted market participants to reconsider the trajectory of interest rates, with some pricing in the possibility of rate hikes by central banks.

Despite these concerns, the outlook suggests major central banks, including the Fed and the Bank of England, are likely to hold interest rates steady for the remainder of 2026. The European Central Bank may consider a modest rate increase if inflation persists. This cautious stance is supported by market expectations, which have already incorporated higher interest rates, leading to increased bond yields across the board.

For bond investors, the current environment presents attractive potential opportunities, especially in short maturity bonds, where yields have risen significantly. High-yield credit markets, in particular, have demonstrated resilience, offering yields of around 7% in the US and 6% in Europe. These higher yields reflect the increased risk premium but also provide income prospects for investors willing to be selective.

Emerging markets also stand out as a key area of interest. The divergence in oil-exporting versus oil-importing economies creates a mixed outlook. Oil-exporting countries are poised to benefit from higher revenues, while some Asian oil importers may experience economic disruptions. Nevertheless, the overall rise in bond yields globally suggests higher potential returns, making emerging market bonds an appealing, albeit selective, investment option.

Overall, while geopolitical tensions and inflationary pressures add complexity, we believe fixed income investors can find potential opportunities in short-term bonds, high-yield credit, and select emerging markets. Careful asset selection and strategic positioning will be critical to capitalising on these evolving market dynamics.

Equity markets: Cautious optimism 

Despite a tumultuous start to 2026, the outlook for equities remains largely positive. After a challenging first quarter marked by significant volatility, particularly in technology stocks and latterly over the Iran conflict, the overall economic and market narrative has not shifted dramatically from the beginning of the year.

At the outset, the consensus was optimistic about global economic growth, especially in the US. This optimism persists, with current estimates for company earnings per share this year actually higher for many indices than forecasts made at the start of 2026. This upward revision underscores the resilience of corporate fundamentals despite the unpredictable environment.

Valuations, which can often become strained during periods of volatility, have remained relatively stable. Notably, for technology stocks in both the US and emerging markets, valuation multiples such as price-to-earnings ratios are holding around long-term averages. This suggests that, despite the recent turbulence, these stocks are not excessively expensive relative to historical norms, presenting potential opportunities for investors.

Looking ahead, several thematic opportunities are emerging. The dominance of emerging market technology stocks, for instance, is an area to monitor, especially as the US Nasdaq index has underperformed so far this year. This could signal a shift in leadership within the tech sector.

In Europe, the focus is on the European Union’s strategic autonomy initiative, which aims to bolster defence capabilities while also supporting industries like pharmaceuticals and industrials. This initiative could unlock new potential investment opportunities within the European market, aligning with broader geopolitical and industrial trends.

Japan remains an attractive market, supported by ongoing fiscal stimulus measures aiming to boost consumer demand and corporate earnings. Additionally, if the Federal Reserve proceeds with interest rate cuts, US small-cap stocks could benefit from the more accommodative monetary policy environment.

Overall, while uncertainties and the potential for surprises remain, the fundamental backdrop for equities in 2026 appears resilient. Investors should remain attentive to shifts in sector leadership, geopolitical developments, and monetary policy, as these will shape the ongoing investment landscape.