February highlighted a transition underway in financial markets. Geopolitical tensions in the Middle East have increased, while the global economy remains resilient and equity market leadership has begun to broaden beyond the narrow group of mega-cap technology companies that dominated returns in recent years.

Global financial markets nevertheless continued to advance. The MSCI All Country World Index rose around 1.5%, bringing year-to-date gains to roughly 4%. Beneath this headline performance, returns varied across regions and sectors. In the United States, the S&P 500 declined around 0.8%, reflecting weakness in several mega-cap technology names, while the equally weighted S&P 500 gained approximately 3.5%, signaling broader market participation. Japanese equities stood out with gains close to 10%, while European equities advanced around 3–4%. Chinese equities declined roughly 6%, weighed down by renewed regulatory concerns in the technology sector.

Geopolitics moved back into focus toward the end of the month as tensions between the United States, Israel and Iran escalated sharply. Military strikes and retaliation raised the risk of a broader regional confrontation and renewed concerns about energy supply from the Gulf region, particularly the Strait of Hormuz through which roughly one fifth of global oil shipments transit. Markets responded with higher oil prices and stronger demand for safe-haven assets such as gold. Gold has gained around 20% year-to-date.

For financial markets, the main transmission channel of geopolitical shocks is usually energy prices, followed by shifts in inflation expectations and risk sentiment. Our base case assumes a period of escalation followed by de-escalation, with economic impact largely limited to temporarily higher energy prices and short-term market volatility. Historically, geopolitical shocks have had only temporary effects on markets unless they lead to sustained disruptions to energy supply. A prolonged rise in oil prices would matter mainly through inflation expectations and central bank policy rather than through an immediate slowdown in global growth. The global economy remains resilient and current oil price levels appear manageable. As a result, the escalation does not alter our broader investment stance.

Against this backdrop, the macroeconomic environment remains broadly supportive for financial markets. US economic activity continues to demonstrate resilience, although recent labor market data suggest that hiring momentum is cooling and employment growth is moderating. The labor market appears to be transitioning into a “low hiring, low firing” phase rather than signaling a sharp deterioration. Inflation continues to ease gradually, although the pace of disinflation has slowed somewhat.

Financial markets expect monetary policy to become less restrictive over the course of the year, with roughly 50 to 60 basis points of rate cuts currently priced in for 2026. In Europe, economic momentum shows tentative signs of improvement after a prolonged period of weakness, supported by stabilizing industrial activity. Meanwhile, parts of Asia continue to benefit from robust manufacturing and investment dynamics linked to global technology and semiconductor demand.

Within equity markets, the most notable development has been the broadening of performance. This shift reflects a more nuanced phase of the artificial intelligence investment cycle. After strong enthusiasm around AI infrastructure and semiconductors, investors are focusing more closely on the sustainability of capital expenditure and competitive dynamics within the technology sector. Rapid advances in agentic AI tools have also raised questions about the long-term business models of some traditional software companies. This has moderated valuations in parts of the technology sector and encouraged rotation toward cyclical sectors such as industrials, energy and materials.

From an asset allocation perspective, we maintain an overweight position in equities while gradually broadening regional exposure. The United States remains supported by solid growth and earnings dynamics, while improving prospects in Europe and stronger earnings momentum in Japan and emerging markets support a more balanced regional allocation.

Fixed income markets also delivered positive returns as government bond yields declined modestly amid safe-haven flows and expectations of eventual monetary easing. US Treasuries gained around 1.8%, while European government bonds rose roughly 1.1%. Credit markets remained broadly stable.

Looking ahead, we remain cautious on government bonds as current yield levels appear inconsistent with resilient growth and still persistent inflation. Within fixed income we therefore prefer corporate bonds over government bonds, particularly in the eurozone where credit fundamentals remain solid.

Commodities were among the strongest performing asset classes during the month. Gold rose sharply as geopolitical tensions intensified, while oil prices increased amid supply disruptions and heightened risks in the Middle East. Structural supply-demand dynamics in metals linked to electrification, energy infrastructure and artificial intelligence remain supportive for the broader commodity complex.

Overall, the investment backdrop remains supportive, although the escalation in the Middle East introduces a more significant geopolitical risk, primarily through potential disruptions to energy markets. At the same time, the gradual broadening of equity market leadership suggests that the rally is becoming less dependent on a narrow group of technology companies and increasingly supported by a wider range of sectors and regions. Against this backdrop, we continue to favour equities over bonds while maintaining broad diversification across regions and asset classes, with high-quality fixed income and assets such as gold helping to strengthen portfolio resilience.

Please find attached our last Asset Allocation Update for March.