Similar to the same period last year, most equities indices worldwide ended the first quarter of 2026 deeply in the red. The themes that dominated the early weeks of the year, including an upswing in emerging markets, a rotation from tech into other sectors, the ‘AI scare trade’ and ongoing worries about Trump’s tariffs, have since been overshadowed by the war in the Middle East.
Outside of the US dollar and selected energy stocks, there were few places to take shelter after the US and Israel launched surprise air strikes on Iran at the end of February. US equities markets recorded their worst first quarter performance since 2022, even though corporate earnings reports were largely positive. After shedding 5.4% of its value in March, the S&P 500 ended the quarter down 4.3%.
The tech-heavy Nasdaq index, meanwhile, shed 7.1% of its value during the quarter. All Magnificent Seven mega-cap stocks lost value as investors fretted about how long it would take Big Tech companies to get returns on their investments in Artificial Intelligence (AI) infrastructure. At the same time, traditional software vendors took pain as investors worried that their businesses might be severely disrupted by AI.
Equities in the rest of the world were also dragged down by the war The MSCI World fell 6.4% during March, ending the first quarter 3.6% down; the MSCI Europe ex-UK Index dropped 2.4% as investors weighed up how higher energy prices might crimp economic growth; the UK’s FTSE All-Share was up 2.5%, buoyed by its commodities exposure; while Japan gave up most of the gains of a strong February but still ended the quarter slightly up.
Uneven impact on emerging markets
The impact on emerging market equities was similarly uneven, though mostly negative. The MSCI Emerging Markets Index fell by just 0.2% in the first quarter, benefiting from support for Asian tech stocks, such as chip manufacturers, prior to the conflict in the Middle East. The first quarter emerging market performance includes a 13.5% retracement in March, highlighting the sensitivity of emerging markets to a risk-off environment.
Among emerging markets, countries such as China, Brazil, and even Saudi Arabia have been resilient. The war has taken a far higher toll on emerging market countries that are significant net importers of crude oil (particularly from the Gulf), including South Africa, India and Turkey. Emerging market currencies mostly weakened in the face of a stronger US dollar and risk-off sentiment.
When it comes to South Africa, the JSE was one of the worst performers in the quarter after having been a standout performer in 2025. March alone that year was one of the worst months for the JSE ALSI since the 2008 Global Financial Crisis, with the bourse declining by 10.5% in rands and 15.6% as measured in dollars. The mining and precious metal stocks that boosted the JSE last year led the losses during the first quarter of this year.
The rand also suffered as investors pulled back from emerging markets and expressed concerns about how higher oil prices could affect the local economy. The rand, which had strengthened to R15.71/$ by late January, weakened to R17.20/$ late in March and was trading at R16.86/$ at the end of the month. This is a reminder of how exposed South African markets are not only to local political risks but also to global risk appetite and macroeconomic conditions.
Gold and dollar trades reverse direction
The US dollar strengthened by 2.1% against a basket of developed-world peers in March, as investors sought safe-haven assets. Along with stronger support for the US dollar, the value of gold and other precious metals dropped significantly in March. The gold price ended March at $4,696, up 8.7% from the beginning of the year, but still nearly 15% off the $5,600 record it touched in late January.
Looking to the rest of the year, the global outlook will depend on how quickly and cleanly the current conflict in the Middle East is resolved. However, it seems likely that higher energy prices and war-related supply chain disruptions would still feed inflation and dampen growth in most parts of the world, even if the recently announced ceasefire were to become permanent. The current consensus is that the war may defer the Fed’s previously forecast interest rate cut from June to September.
This all unfolds with a change of the guard at the US Federal Reserve set for May. Despite Trump’s stated preference for lower interest rates, incoming Chairman Kevin Warsh may find it taxing to balance economic growth, the labour market and inflation against the backdrop of higher energy prices. These are challenges that most central banks worldwide will face.
Base case is de-escalation, but risks remain elevated
The eleventh-hour ceasefire announced on the evening (Eastern Time) of 7th April has helped to somewhat reverse much of the negative moves seen in March, with the MSCI up 3.2% in April and 7.1% off the 30 March lows. This means that this global equity benchmark is now only 2.1% down since the start of the war and 1% up since the beginning of the year.
While the ceasefire remains tenuous and the gap between the requirements of each party is much wider than the Strait of Hormuz, our base case remains that the US and Iran both need to find an off-ramp and an enduring solution that allows them each to walk away claiming specific wins. In such an instance, we would expect some of the trends evident before the war to reassert themselves. These include a broadening of the rally from technology to other sectors, an appetite for emerging-market assets, and central bank buying of gold.
Nonetheless, the risks of a more prolonged conflict that upends energy markets for months to come cannot be ruled out, and the war may well have damaged the global economic outlook for the year.
As we noted at the beginning of this article, 2025 started on an uncertain footing as investors tried to make sense of how Trump’s tariffs would affect markets. Despite the turmoil of “Liberation Day” in April 2025, the S&P 500 ended the year up 17.9%, while the MSCI returned 21%. Whether we see a similar turnaround in 2026 will ultimately depend on the direction of interest rates, corporate earnings and, in the first instance, the outcome of the war.
