Key Points
The commodity supply shock slowed global growth mildly, with regional divergence
- While the Iran War catalyzed a material supply shock and renewed geopolitical uncertainty, 2026 global growth is expected at 2.9%. Net energy importers—including many European and Asian countries—saw their growth prospect hit hardest due to the war.
- Renewed inflation concerns resulting from higher commodity prices saw central banks pivot towards tighter monetary policy, while in the United States and parts of Asia, robust investment in AI-related infrastructure provided an additional boost to economic activity.
Global equities delivered another fiscal year (FY) of strong gains across a range of regions
- Emerging markets (50.2%) and Japan (45.3%) gained the most, although that outperformance reduced somewhat in dollar terms given domestic currency depreciation. Developed markets (21% in dollar terms) also posted strong performance, aided by multiple expansion.
- The artificial intelligence (AI) buildout, and related market sentiment, became a clear driver of relative performance, particularly in first half 2026. US and Asian technology names became increasingly prominent weights in indexes, driven by material earnings per share (EPS) growth.
The dollar appreciated modestly, with the US relatively insulated from Middle East developments
- Recovering from a period of weak performance due to US-centered trade policy uncertainty, the dollar became a relative safe haven at the onset of the Iran War, given the US’ energy self-sufficiency.
- Higher relative interest rates—based on reduced expectations of Fed rate cuts as the labor market showed resilience, and capital inflows driven in part by AI-related market sentiment—also helped the dollar regain some of its strength.
Bond market returns lagged upon renewed inflationary impetus
- Bond yields rose on heightened inflation concerns and central bank interest rate hike expectations resulting from the Iran War. Despite the macroeconomic shock, corporate fundamentals broadly remained intact as credit spreads stayed close to historically tight levels.
- Japanese government bond yields rose the most on renewed fiscal easing and monetary tightening, while Treasury yields also increased as economic resilience shifted expectations from Fed easing toward interest rate hikes in FY 2027.
Real assets posted strong gains as global supply shock bites and AI buildout demand strengthens
- Natural resource stocks saw the largest move higher, driven in part by higher energy prices as the flow of ships through the Strait of Hormuz became materially impaired. Around 20% of global oil and gas supply transits through the strait.
- Gold exhibited strong net performance of 22.9% in FY 2026, supported by official institution reserve diversification and retail participation. Those tailwinds reversed, with gold down 23% since the Iran War started.
- Rising AI and energy transition demand, against a backdrop of constrained supply, also drove several base metal prices higher.