MACRO AND MARKET REVIEW
After a strong start to the year for markets, with robust non-US equities and declining interest rates (the US 10-year yield breaking comfortably below 4% on the last day of February), the war in Iran changed the situation entirely. Following US and Israeli attacks on Iran, the Strait of Hormuz instantly became the centre of attention for financial markets. The rapid decline to near zero in tanker transit through the strait triggered fears of oil and energy scarcity, pushing energy prices to elevated levels. This energy shock resembles the Gulf War of the 1990s and led market participants to rapidly reprice various assets: non-US equities were hit harder than US ones as investors quickly monetised that trade in their portfolios. The expected rise in inflation caused both short and long-term yields to increase, as ECB rate hikes started being priced in and the Fed was seen as much less likely to cut rates this year due to stronger anticipated inflation. Considerable uncertainty surrounds this situation as March draws to a close, evident in how central banks have characterised the shock: the ECB called it a "stagflation shock" while the Fed only sees marginally higher inflation. The release of 400 million barrels from strategic oil reserves has helped stabilise markets, but the situation remains unclear. There is a chance the conflict could end sooner rather than later given mounting market and public pressure on the White House, but the situation remains highly uncertain, as oil production disruption could last longer than the conflict itself, meaning inflation pressures may persist.
In this context, March was a turbulent month for financial markets, dominated by surging oil prices (+51.3%) that sent shockwaves through all asset classes amid rising geopolitical tensions. Global stocks suffered significant losses, with the MSCI World falling 7.3% and emerging markets dropping even further (-12.4%), while European markets (-9.3%) were hit especially hard due to their energy dependence. Bond yields rose sharply across major economies as inflation concerns grew, with the US 10-year yield increasing 38 basis points and German yields climbing 36 basis points, while short-term rates moved even higher as markets anticipated more aggressive central bank action. Credit markets showed clear signs of stress with widening spreads across high yield, investment grade, and emerging market debt as investors sought higher compensation for taking risk. The dollar strengthened 2.4% as a safe-haven currency, while gold surprisingly fell 11.6% despite the geopolitical uncertainty, mainly because rising interest rates made non-yielding assets less attractive. This challenging environment highlights how the energy crisis has fundamentally shifted inflation expectations and monetary policy outlooks for the months ahead.
PORTFOLIO ACTIVITY
Portfolio exposure decreased sharply over the month, closing the month at c250% as risk budget shrank by 15%. Allocation rotated towards hedging assets (+10% to long volatility strategies, inflation swaps and sovereign bonds) and commodities (+1.5%), away from cyclical assets (credit and equities). Our volatility estimates soared, with all asset classes now above their long-term median level – equities and commodities entering their highest quartile. In parallel, momentum signals deteriorated over the month. Our aggregate risk-appetite indicator proved more robust, staying in risk-on territory, although its more reactive individual component fell. On the macro side, our growth and monetary policy nowcasters continued pointing to subdued data, slightly below historical average, from which it remains difficult to deduce a clear trend. Inflation data however saw a slight increase over the month, driven only marginally by rising oil prices. April could, however, see our inflation metrics rise due to the Iran shock.
PERFORMANCE
In March 2026, LO Funds IV–All Roads Enhanced was down 4.3% (USD IA share class). Over the month, sovereign bonds detracted 380 bps while equities detracted 330 bps with negative contributions from both developed and emerging markets. Corporate credit detracted an additional 80 bps while commodities mitigated the fall with a positive contribution of 230 bps. Additionally, our overlays contributed 50 bps, with carry and macro strategies up and trend strategies down. Finally, our tail hedges added 30 bps, mostly from rates volatility strategies.
OUTLOOK
The Iran war has reduced the odds of a Goldilocks scenario driving all of 2026. Higher inflation and marginally lower growth prospects outside the US need to be factored into 2026 returns and risk projections, and the case for an ex-US rally is less clear than before. With uncertainty rising, investors should respond with diversification given the difficulty in predicting future consequences. This situation doesn't necessarily spell bad news for markets in the medium term but provides reason to remain prudent and diversified across allocations and risk-taking for the coming weeks. April could see a recovery, but the inflation scar will likely continue to show in yields.
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