MACRO AND MARKET REVIEW
Markets were rocked in March as the eruption and escalation of war in the Middle East upended existing market narratives. A spike in oil prices saw fixed income markets hit from both angles, as credit spreads and rates both increased on stagflation concerns. Despite the risk-off environment, duration was the worst hit, particularly in Europe, while high yield spreads decompressed versus investment grade.
Following the start of strikes by Israeli and US forces against the Iranian regime and the death of the Supreme Leader Ali Khamenei, escalation in response by the Islamic Revolutionary Guard Corps (IRGC) was rapid, with counterstrikes on not only Israel, but also quite unexpectedly on neighbouring Gulf states. Not only did this response cause havoc in the wider Gulf region, it also halted marine traffic through the Strait of Hormuz, a waterway that would become Iran's key source of leverage within the conflict. Pre-war, the prospect of complete closure of the strait was considered one of the worst possible outcomes for the global economy from conflict in the region.
With market-moving headlines hitting the screen multiple times per day, summarising the chronology of events remains difficult at best, but broadly the market response from a risk-off perspective developed in two stages. The opening fortnight of the conflict largely focused on spiralling energy costs resulting from strikes on refineries and infrastructure in the Gulf region and the loss of supply from the closure of Hormuz. The perceived stagflationary impact saw both rates and credit sell off in tandem, with short end rates taking the bigger hit, as the outlook for central bank cuts was swiftly repriced to hikes to combat an energy supply squeeze that pushed prices higher. This first stage culminated with the month's central bank meetings, where the institutions emphasised readiness to combat inflation if required. This also coincided with escalating attacks on energy infrastructure in the Gulf, sending gas prices sharply higher. The biggest swing in central bank pricing came in the UK gilts market, with markets moving from pricing two cuts for 2026 to as high as four hikes following the gas price spike.
The market then moved into a second stage, after some pullback in hostilities directly targeting energy infrastructure, focusing more on the growth impact that higher energy prices would cause through demand destruction. This saw rate volatility reduce somewhat, while credit spreads continued to grind higher. Market dynamics were made harder to navigate thanks to volatile news flow on the conflict coming from the US administration, regularly touting victory and an imminent end to the conflict before sharply reversing course and threatening escalation.
Tracking backward-looking data felt futile through the month but did provide some signs of how economies were positioned heading into the conflict. US payrolls surprised to the downside at the start of the month, but showed some recovery later in the month, maintaining a softening trajectory but not a collapse in the labour market. Inflation also continued to show some signs of an underlying uptick even ahead of conflict, adding further headwinds for central banks eyeing cuts. PMI numbers towards the end of the month also began to show early signs of the stagflationary impact the conflict generates, with input prices rising while demand softened.
War-driven markets are notoriously difficult to manage on a day-to-day basis, particularly in an age where sentiment can be shifted on a single tweet. We believe that keeping focused on longer term return prospects is key in such scenarios, but remaining nimble to material developments when they occur. All things considered, despite the drawdown seen this month from a snap back to positive correlation between rates and credit, market action didn't suggest panic, with positioning entering the conflict on conservative footing and large cash holdings, limiting the need for forced selling. We have championed the strength of the technical picture in credit for some time and feel this stress test underlined the technical robustness. Duration was more exposed but found stable footing after a tough start to the month left a cleaner positioning picture. This, alongside the news flow at the time of writing of a mutual but fragile ceasefire, we remain cautious but not frozen, looking for opportunities as they arise in fundamentally sound credits that are beginning to offer value.
PORTFOLIO ACTIVITY
During Q1 2026, the CHF primary market was very active. Several issuers accessed the market, including large international firms which issued multi-tranches CHF deals. We selectively participated in some of those new issues.
Mondelez International Inc issued a CHF 0.85bn three-tranche deal for the first time since 2017 (implied temperature rise of 1.5 °C vs. sector average of 3.0 °C; carbon investment ratio of 229 tCO2e vs. 1179).
We also participated in a two-tranche issuance from Volvo AB (implied temperature rise of 1.3 °C vs. sector average of 3.0 °C; carbon investment ratio of 3354 tCO2e vs. 2553). Operating in a hard-to-abate sector, Volvo has set out a clear decarbonisation pathway and a long-term ambition to reduce greenhouse gas emissions across its value chain. The company has defined interim targets for both its operations and the use-phase emissions of its products, supported by ongoing investments in electrification, fuel efficiency and zero-emission technologies. Taken together, these elements position Volvo comparatively well within the automotive sector.
In the utilities space, we subscribed to a two-tranche green bond issuance from E.ON, a company that continues to benefit from its strategic shift away from fossil-fuel-based generation towards renewables and regulated networks. E.ON displays an implied temperature rise of 1.7 °C compared with a sector average of 2.6 °C, and a carbon investment ratio of 490 tCO2e versus 1’202 tCO2e for the sector.
Finally, we also took part in some issues in the banking sector such as a green bond issued by BNP Paribas (implied temperature rise of 2.2 °C vs. sector average of 3.0 °C; carbon investment ratio of 114 tCO2e vs. 660).
PERFORMANCE
The Fund slightly underperformed its benchmark on a net-of-fees basis during Q1 2026. Issuer selection was slightly negative, particularly in the utility and financial sectors. Sector allocation had a marginally negative impact, while the yield curve effect was marginally positive.
In March, markets were marked by elevated volatility, driven by geopolitical tensions related to the war in Iran. Despite this challenging environment, the Fund proved resilient and finished the month only slightly behind its benchmark on a net-of-fees basis. Sector allocation contributed modestly positively to performance, supported in particular by our slight overweight position in Utilities. Security selection was slightly negative overall, with Financials being the main detractor. The yield curve impact was neutral, as the Fund’s duration remained broadly aligned with that of the benchmark.
SUSTAINABILITY
The Iran Shock: Renewables as the new energy security
The ongoing energy crisis triggered by the war in Iran is once again exposing the deep structural vulnerabilities embedded in a fossil fuel centred global energy system. The conflict has already disrupted roughly one fifth of global crude and natural gas supply through the blockage of Hormuz Strait and the damage inflicted on various Middle East oil and gas fields. As a result, oil prices increased sharply with Brent rising almost 50% since the beginning of the conflict on February 28th and energy sector credit held up better than most other sectors of the market. For sustainability investors like ourselves, this shock reinforces a central conviction: reliance on concentrated, centralised fossil fuel infrastructure is a material resilience risk for supply chains, economies, companies and eventually portfolios.
At LOIM, we are convinced that these disruptions strengthen the strategic and economic rationale for scaling homegrown renewable energy. Unlike fossil fuels, which, as highlighted by the UN Secretary-General can be "blockaded, weaponised or destabilised" through geopolitical conflict, domestic renewable power offers a structurally more secure, decentralised and resilient energy architecture. We believe that the transition to a sustainable economy is fundamentally a transition to a more resilient economy. Decentralised energy systems, electrification, storage, grid modernisation, and efficiency technologies all stand to benefit as governments and corporates seek to harden energy systems against geopolitical shocks.
In our view, the medium to long term investment opportunity lies in systems that reduce dependency on volatile fossil fuel supply chains and enable a resilient, renewables-based energy model. The Iran-related energy crisis does not just highlight this need; over the long term it might very well accelerate it. Our TargetNetZero strategies are structured to capture the full breadth of transition opportunities while maintaining resilience through their diversified, economy-wide exposure.
condividi.