Inflation is falling but not yet fully tamed. Interest rates are moving lower, though cautiously. And just as investors were settling into a relatively stable economic outlook, geopolitics has returned to the foreground.
Recent developments in the Middle East have introduced another layer of uncertainty to an investment environment that was already characterised by elevated valuations and relatively calm investor positioning. While the humanitarian consequences of conflict are, of course, the most important consideration, markets are focused on the potential economic spillovers — particularly through energy prices.
At GSI, moments like this are a reminder that successful investing relies less on reacting to headlines and more on maintaining disciplined portfolio construction.
Inflation: Nearer the Target, Not Quite There
The latest Office for National Statistics release shows UK CPI inflation at 2.9% year-on-year (January 2026). This represents meaningful progress compared with the elevated levels of recent years.
However, the composition of inflation remains important. Goods inflation has softened significantly and energy effects have largely normalised. Yet services inflation remains above 4%, reflecting ongoing wage pressures and persistent domestic cost pressures.
This “last mile” of disinflation continues to challenge central banks globally. It explains why interest rate cuts are likely to proceed gradually rather than aggressively.
The Bank of England: Cutting, Carefully
The Bank of England base rate now stands at 3.75%, following measured reductions through the final quarter of 2025.
Markets initially expected a faster pace of easing in 2026, but that view has moderated. The Monetary Policy Committee has signalled that while inflation is moving in the right direction, policy must remain sufficiently restrictive to ensure that progress is sustained.
As a result, gilt yields have stabilised rather than falling sharply, particularly in intermediate maturities.
For investors, this environment offers several constructive features:
- Attractive income from high-quality fixed income
- Positive real yields
- A more balanced relationship between bonds and equities than we experienced during the inflation shock of 2022–23
Within GSI’s Compass portfolios, bond allocations remain diversified across UK gilts, global sovereign debt and selective credit exposure, aiming to provide both income and stability.
Geopolitics Returns: Iran, Energy and Market Volatility
Recent developments in the Middle East have reminded markets how quickly geopolitical risks can influence investor behaviour.
Escalating tensions involving Iran, Israel and the United States have raised concerns about the potential disruption of energy supply routes, particularly the Strait of Hormuz, through which a significant proportion of global oil exports pass.
Even the threat of disruption has been enough to trigger volatility across markets. Recent trading patterns have followed a familiar “risk-off” sequence. Initially, investors rotated into defensive sectors and energy producers while selling more economically sensitive areas such as financials and mining. As the week progressed, the de-risking broadened, with investors reducing exposure across a wider range of assets.
Importantly, this type of market reaction is not unusual. Historically, regional conflicts tend to have a sustained impact on asset prices only when they materially disrupt global growth, inflation or financial conditions. The key transmission channel today would be energy.
A prolonged disruption to shipping through the Strait of Hormuz could push oil prices significantly higher, potentially feeding through into inflation and tighter financial conditions globally. However, there are also strong incentives for de-escalation.
Closing the Strait would severely damage Iran’s own export revenues, while major economies such as China and the United States have strong motivations to avoid sustained energy price shocks. Political considerations — including the US mid-term election cycle — also increase the likelihood that negotiations eventually emerge.
For now, markets appear to be balancing short-term caution with the expectation that tensions will ultimately stabilise.
Growth Broadens — But Leadership Is More Balanced
Equity performance in early 2026 has been constructive, though leadership has broadened compared with the narrow concentration seen in previous years.
Year-to-date strength has been supported by:
- US equities in sterling terms, helped by dollar resilience
- Increased participation from value sectors and smaller companies, particularly industrials and financials
- Continued structural demand for AI infrastructure and semiconductor investment
- Select high-quality healthcare and technology companies
Unlike the highly concentrated rallies of 2023 and parts of 2024, market gains in early 2026 have been more widely distributed.
Meanwhile, UK mid-caps — particularly within the FTSE 250 — have lagged global peers, reflecting domestic economic sensitivity and ongoing caution around the UK growth outlook.
Concentration risk within US mega-cap stocks remains elevated relative to historical norms, though earnings delivery has so far supported valuations. The question for investors is one of sustainability rather than immediate excess.
Within GSI’s Atlas portfolios, exposure to global structural growth themes remains balanced by valuation discipline and complementary allocations to defensive sectors and selective value opportunities. Participation does not require over-concentration.
Bonds and Equities: A More Normal Relationship
Encouragingly, bonds are once again behaving more traditionally during periods of equity volatility. With inflation stabilising and rate expectations becoming more anchored, high-quality fixed income is beginning to act as a partial stabiliser in balanced portfolios. This marks a welcome shift from the unusual period in 2022–23 when both bonds and equities fell simultaneously.
For investors approaching the end of the tax year, the restoration of diversification benefits is an important development.
The Cost of Waiting
As 5 April approaches, a familiar behavioural pattern often emerges: hesitation.
Investors frequently delay decisions while waiting for:
- clearer interest rate signals
- clearer geopolitical outcomes
- clearer economic forecasts
Yet markets rarely provide perfect visibility.
UK household cash balances remain elevated compared with long-term norms. Holding liquidity for short-term needs is sensible, but holding excessive cash in a falling-rate environment carries an opportunity cost.
Rebalancing — trimming areas that have performed strongly and topping up areas that have lagged — is rarely dramatic. Over time, however, it can be one of the most effective disciplines in long-term investing.
How GSI Portfolios Are Positioned
Across Compass and Atlas portfolios, positioning remains broadly consistent:
- Broad global equity exposure with controlled US concentration
- Participation in structural growth themes, including AI infrastructure
- Diversified fixed income allocations capturing attractive real yields
- Active monitoring of currency exposure, particularly the US dollar
In short: constructive, diversified and disciplined.
Recent portfolio performance has also benefited from strength in areas such as Japan, emerging markets and gold, demonstrating the importance of global diversification during periods of geopolitical uncertainty.
Final Thoughts: Calm Is a Strategy
Markets in early 2026 are neither euphoric nor fearful. They are adjusting.
Inflation is falling, but not yet at target. Interest rates are easing, but gradually. Geopolitical tensions have risen, but their economic impact remains uncertain.
Bull markets rarely move in straight lines. Periods of volatility — whether triggered by inflation concerns, geopolitical shocks or policy changes — are a normal part of the investment cycle. The temptation during such periods is to react. The discipline is to remain aligned with a long-term strategy.
As always, your financial plan — not the latest headline — should guide investment decisions.
If you would like to review your portfolio positioning ahead of the tax year-end, your GSI adviser will be pleased to assist.
