The war in Iran has understandably dominated the headlines, with both stocks and bonds in thrall to volatile crude oil prices. Higher energy bills threaten to push inflation higher down the line and subsequently raise the prospects of higher interest rates. But if we rewind to the start of the year, most investments actually got off to a pretty good start.
Corporate earnings maintained healthy momentum. Inflation appeared to be moderating, and the gravest geopolitical worry was Trumpian hoo-ha over ownership of Greenland. Joint US-Israeli strikes on the Iranian leadership and its armed forces changed all that. The spectre of another Middle Eastern energy crisis spooked markets, with investors second-guessing President Trump’s ability to judge whether a ceasefire will hold or whether a deal is imminent.
Sticking to our knitting
The conflict has prompted some investment gurus to don their ‘proverbial military fatigues’ to expound on the Strait of Hormuz. As ever, though, our stance at Weatherbys is that it is simply not possible to gaze into the crystal ball and see the future. Things might seem especially unpredictable right now, but that was equally true, if not more so, in the days before the conflict began.
The world is not a snooker table with angles of impact easily calculable. It’s increasingly shaped by people and their unpredictable ideas. That’s why our passive investment portfolios do not lean any more towards shares in any particular country or industry than in another. Better, we argue, to let free markets drive allocations. They are not infallible. This approach has done very well over the past decade, but there have been periods when it has fared less well – and the first three months of 2026 were one of them. That’s because the FTSE 100, which has been terribly sluggish compared to global stock markets for many years, has enjoyed a purple patch lately, thanks to its abundance of energy and mining companies. As a result, investment approaches that favour our home market have made up some lost ground.
Higher inflation, for now
Meanwhile, yields on British government bonds, known as gilts, surged, reflecting both the fact that previously pencilled-in interest rate cuts were hastily erased by analysts and the expectation of yet more public sector borrowing to alleviate inflationary pain. While this may be a headache for the Chancellor, it represents an opportunity for ordinary savers and investors. That’s especially true for index-linked gilts, whose regular coupon interest payments and final repayment at maturity are linked to inflation. At the time of writing, conventional gilts maturing over the next few years offer yields of around 4-4.5%.
The latest inflation figures show the annual change in the UK Consumer Price Index (CPI) rose from 3% to 3.3% in the year to March, driven by higher fuel costs. Clearly, this number is going in the wrong direction, but on the plus side, it’s not as high as the Bank of England had feared when it decided to keep interest rates on hold at 3.75% in April.
Core inflation, which strips out items from the hypothetical shopping basket, fell slightly from 3.2% to 3.1%. The headline inflation figure will likely fall in April thanks to OFGEM’s energy bill price cap, before rising again in July, when that ceiling is expected to be raised. While economists fear inflation could head north of 4%, or even 5%, citing high producer input costs that have yet to be passed on to end consumers, consumer demand is weak, too, which may offset any steep rise. The Bank of England will not want to be perceived as being slow to act on rising inflation, but to us, it seems plausible that by the end of the year, the worst of any inflationary blip might be over.
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US uncertainty
In the US, the latest figures show a marked slowdown in economic growth. Some argue that it is symptomatic of a whiplash economy that has been buffeted by supply shock after supply shock, Ukraine, trade tariffs and now war in Iran, not to mention the potential upheaval introduced by AI. The US Federal Reserve is soon to have a new chairman, expected to be Kevin Warsh, whose approach to policy is notably different from that of outgoing Chairman Jerome Powell. While Powell emphasised following the data, Warsh appears more argument-based. This could be risky if the Fed ignores ground realities and becomes more ideological, especially since current data is unclear and suggests conflicting responses depending on whether concerns are about inflation or employment.
Past conflicts are no guide to the future
Markets react to the unknown. Bond yields rose as the conflict took hold because markets expected higher interest rates, yet rates were expected to fall in a world where Iran never made the headlines. But we can’t know the future – whether the Ayatollah would have succeeded with atomic weapons, used them against Israel or the West, or if energy issues would worsen. It’s important to consider not only the immediate effects but also the countless counterfactual worlds where these events didn’t happen.
The unpredictability of these worlds means past conflicts aren’t reliable guides for future market behaviour. Nor can we merely project chart trajectories into the future. Indeed, the near-term price spikes we must now deal with could, in the grand scheme of things, prove trivial compared with the cultural and political shifts now set in motion. It would be folly to try to prophesy any of it.
About William Morris
William is Head of Investments at Weatherbys Private Bank. He has over a decade of experience encompassing investment advice, portfolio optimisation and risk modelling, and enjoys bringing this world to life in a friendly and engaging way.
What you need to know
Investments can go up and down in value and you may not get back the full amount originally invested. Past performance is not a guide to future performance.