Executive Summary
Dear Readers,
Since the outbreak of the Iran conflict at the end of February, there have been, aside from liquidity, few safe havens in traditional asset classes. Alongside equities, bond yields have also suffered under rising interest rates, and gold has given up much of the price surge that occurred earlier.
However, during the correction phase, it became clear that the US stock market has once again proven more resilient during periods of stress than the rest of the world. The US dollar, which is generally affected by a loss of confidence in current US politics, has also contributed to stability in globally diversified portfolios.
It can also be observed that, as soon as even the faintest hope for de-escalation in the Iran conflict arises, investors are quick to place their liquidity reserves on the market. Dynamically positive price jumps, as we saw at the end of March and the beginning of April, are therefore always possible.
The capital market landscape thus ranges from gloomy stagflation scenarios to a rapid resolution of the conflict, accompanied by positive economic trends. This almost binary environment makes positioning particularly challenging.
Against this backdrop, our approach focuses on even broader diversification and avoids one-sided positioning based on extreme scenarios. On the equity side, a stylistic broadening across growth and value stocks plays an important role. To reduce concentration risks, particularly in the US stock market, the inclusion of US small caps is also sensible. Overall, we are convinced by the growth prospects of US equities, which, after the correction, are now trading at more moderate valuation levels.
In the fixed-income segment, we are positioned cautiously in the high-yield sector and maintain a clear underweight. Credit risk premiums for corporate bonds with higher ratings are currently not convincing, which is why we have also taken a more cautious stance here.
Despite the currently high volatility, we remain convinced of gold, as we expect sustained strong demand from central banks in emerging markets. For additional diversification in multi-asset portfolios, we continue to regard convertible bonds as an attractive complement.
Thus, even in these challenging times, we remain true to our investment philosophy and regularly and critically review our capital market assessments as part of our investment process. We act with a steady hand, and when adjustments are necessary, we pursue a contrarian approach. This strategy has proven successful during previous crises and reinforces our current positioning – even in these turbulent times.
I hope you enjoy reading!
Yours sincerely,
Maximilian Hefele
Deputy Chief Investment Officer
Compass
In our baseline scenario, we currently expect military tensions to ease in the coming weeks, leading to a gradual and significant decline in energy prices from their current levels. However, a rapid drop back to pre-Iran-war levels is unlikely, as oil and gas facilities have been damaged and will take some time to repair.
In this scenario, driven by energy prices, inflation rates would rise noticeably starting in March—both on a month-over-month and year-over-year basis—causing uncertainty among businesses and consumers. However, the core inflation rate, which excludes volatile energy and food prices, would remain largely unchanged. In our baseline scenario, energy prices fall before they can spread to a significant extent to the prices of other goods and services and drive core inflation noticeably higher. Once energy prices have fallen again, inflation rates would quickly decline. Uncertainty would dissipate, and the loss of purchasing power would be moderate. However, since the inflation rate will be significantly higher for several months starting in March, the annual average inflation rate is likely to rise to about 2.6% compared to the previous year. Without the war, average inflation of just under two percent would have been likely.
Central banks could “look through” such a short-term rise in prices. They have already responded to the changed situation in their communications and signaled the possibility of higher interest rates should inflation become entrenched. However, as long as medium- and long-term inflation expectations remain anchored near central bank targets, we believe monetary authorities will not tighten monetary policy—or will do so only very moderately—because doing so would weaken the economy in a fragile situation. Central banks are therefore waiting to see how the situation in the Middle East and in energy markets develops.
With each passing day, however, the risk grows that the war will drag on and energy prices will remain high for a correspondingly longer period. In such a risk scenario, the damage to the economy and price stability would be significantly greater. The specific outcomes could vary greatly depending on the duration and intensity of the damage.
Macro: Geopolitics Overshadows Everything
Geoeconomics dominates the economic outlook. The course of the economy in 2026 will depend largely on the duration and intensity of the war in Iran, as energy prices hinge on these factors. In any case, inflation rates will rise significantly for several months. However, if the war ends quickly and energy prices drop significantly, inflation could subside again before it spreads noticeably to other goods and services. In that case, central banks would not need to react to the energy price shock. But if the war drags on for months and energy prices remain at current levels for an extended period, there is a risk of stagflation or even a recession. This would be a difficult situation for central banks, as interest rate hikes would curb inflation but at the same time weaken an economy that is already sluggish. More than ever, all eyes are therefore on Washington, D.C., and Donald Trump: How and when will the American president find a way to end the war in the Middle East?
Equities: Geopolitical Uncertainty Weighs on Equity Markets
Geopolitical tensions and rising energy prices shaped the first quarter of 2026. After a strong start to the year, the Iran conflict, tariff disputes, and inflation concerns dampened sentiment across global equity markets. Oil prices rose by more than 70% to nearly US$120 per barrel, pushing the VIX above 30 and weighing on consumer confidence. European and Asian markets were recently hit by their dependence on energy imports, while the US showed relative strength thanks to its role as an energy exporter. The further path of equity markets will depend largely on the course of the conflict in the Middle East. Elevated energy prices carry stagflation risks and complicate monetary policy. However, the fundamental backdrop remains solid, with double-digit earnings growth still expected for the S&P. We do not currently see the beginning of a bear market. Accordingly, we remain neutrally positioned, maintain broad diversification across caps, styles, and sectors, stay overweight US equities, and have sold India in favour of broadly diversified emerging market investments.
Bonds: From Resilience to Uncertainty: Bond Markets in the Shadow of Geopolitical Tensions
We began the year in an environment that felt remarkably resilient, with many central banks mainly focused on the “last mile” in the fight against inflation. The joint military strikes by the US and Israel against Iran and the resulting blockade of the Strait of Hormuz caught many off guard. The market reaction in the bond markets was accordingly severe. Short-term inflation expectations rose sharply, and bonds were broadly sold off. The resilience that characterized the start of the year has been replaced by a regime of high volatility and rising capital costs. The likelihood that inflation will be fought through higher key interest rates in the eurozone or a phase of persistently high rates in the US has increased significantly. In this environment, we see good reason to maintain a more defensive positioning and stand ready to seize opportunities should a diplomatic resolution become more likely and the economic impact and associated idiosyncratic risks become easier to assess.
Alternative Investments: Gold: When Safe Haven Dynamics Temporarily Falter
Gold had a volatile start to 2026, rallying strongly before correcting despite rising geopolitical risks. Liquidity pressures and crowded positioning triggered broad selling, with gold used as a ready source of cash. This was compounded by an energy shock linked to the US–Israeli conflict with Iran. It fueled inflation concerns and led to a more hawkish outlook for central banks. Rising real rates and a stronger US dollar added further pressure on gold.
While near-term dynamics have weakened the technical picture, the broader investment case remains intact. Structural central bank demand, persistent geopolitical risks, and rising global debt continue to support gold’s role as a store of value. In our view, recent weakness reflects cyclical pressures rather than changing fundamentals. We remain constructive and overweight, expecting the long-term upward trend to persist despite heightened volatility.
Currencies: Duration of the Iran war determines the further development in currency markets
The US dollar has recently benefited from increased risk aversion and rising energy prices, supported by the United States’ role as a net energy exporter. However, with an expected easing of the military situation in the coming weeks and gradually declining energy prices, the current strength of the dollar is likely to prove temporary. Donald Trump’s unpredictable policy stance and questions surrounding the independence of key US institutions are expected to come back into focus and weigh on confidence in the dollar.
The Swiss franc confirmed its role as a safe haven during the first quarter of 2026 and is likely to remain in demand amid ongoing uncertainties. At the same time, the strong franc is increasingly burdening the export-oriented economy, prompting the Swiss National Bank to step up interventions to limit further appreciation.
Markets expect a significant policy shift by the Bank of England, but its future course remains highly uncertain. Even before the surge in energy prices, the UK was struggling with stubborn inflation, while overall economic momentum remains subdued. Against this backdrop, we do not expect any significant appreciation or depreciation of the pound in the coming months.