Global markets experienced a turbulent start to 2026 as escalating geopolitical tensions in the Middle East became the dominant driver of market outcomes. An initially supportive economic backdrop was rapidly overshadowed toward the end of February by the sharp escalation of conflict involving Iran, which materially altered investor sentiment and triggered a pronounced risk‑off environment across asset classes during March.
The conflict had immediate and far‑reaching implications for markets, primarily through heightened concerns around global energy supply. Iran’s strategic position and its ability to influence traffic through the Strait of Hormuz raised fears of material disruption to oil and gas flows. These risks were quickly reflected in a sharp rise in energy prices, higher inflation expectations and increased uncertainty around global supply chains. As a result, risk premia rose across markets and asset valuations came under pressure.
Equity markets weakened significantly as geopolitical risk intensified. Global equities declined sharply in March, with the MSCI World EUR Hedged falling by 5.9%, reflecting a broad‑based sell‑off driven by higher discount rates and declining risk appetite. Elevated energy prices compounded existing inflation concerns, particularly in developed markets, leading investors to reassess growth and earnings prospects. Defensive positioning increased, while previously resilient segments of the market struggled to withstand the combined impact of higher uncertainty and rising costs.
Currency markets played a critical role in shaping outcomes for euro‑based investors during this episode of market stress. As geopolitical tensions escalated, the U.S. dollar strengthened materially, appreciating by 2.5% against the euro in March as investors sought safe‑haven assets. This provided a meaningful offset for unhedged global exposures, highlighting the importance of currency dynamics and the role of the U.S. dollar during periods of acute geopolitical risk.
Fixed income markets also reflected the inflationary implications of the conflict. Sovereign bond yields rose sharply as markets priced in higher inflation risks stemming from elevated energy prices. Over March 10‑year yields increased by 35 basis points in the U.S. and 34 basis points in Germany, resulting in negative returns for government bonds, particularly in Europe. Credit markets proved relatively more resilient, supported by still‑attractive all‑in yields, although credit spreads widened modestly in line with the broader risk‑off environment, remaining below the 100‑basis‑point level.
Central banks responded cautiously to the evolving backdrop. The surge in energy prices complicated the inflation outlook at a time when growth momentum was already moderating, prompting policymakers to adopt a more data‑dependent stance. Expectations for near‑term policy easing were scaled back as markets reassessed the balance between inflation risks and slowing economic activity in the wake of the conflict.
Within alternative assets, the ramifications of the geopolitical shock were more mixed. Real assets with inflation‑linked cash flows, particularly infrastructure and energy‑related assets, benefitted from the rise in commodity prices and inflation hedging characteristics. In contrast, sectors more sensitive to financing conditions and growth expectations, such as traditional real estate, remained under pressure as higher yields and increased uncertainty weighed on valuations.
Overall, Q1 2026 served as a clear reminder of how rapidly geopolitical shocks can reshape market dynamics. The escalation of the Middle East conflict acted as a catalyst for higher inflation expectations, rising yields and a broad reassessment of risk across asset classes. While longer‑term fundamentals remain supportive in several areas, near‑term visibility has deteriorated materially, reinforcing the importance of diversification, disciplined risk management and careful consideration of geopolitical exposures within portfolio construction.
Against this backdrop, the Pensions Caixa 2, F.P. Fund delivered -1.6% YTD as of the end of March and a positive 1-year return of 7.6%. Over five years, the fund achieved an annualized return of 4.5%, slightly underperforming against long‑term target of 5.4% (Euribor + 3.5%). Importantly, the fund continues to rank among the top 5% of pension funds in Spain over both 5‑ and 10‑year periods within the Employment and Associated Systems. This consistent outperformance highlights the resilience and effectiveness of its long‑term investment strategy.
In summary, the Pensions Caixa 2 Fund continued to make solid progress throughout 2025 and early 2026, delivering results aligned with its objectives despite a complex market environment. With markets expected to remain dynamic and sensitive to monetary policy and geopolitical developments, the medium‑ and long‑term outlook remains favourable for well‑diversified investors. The fund’s consistent track record reinforces the strength of its approach to generating long‑term value.