Oil
The defining feature of Q1 was the sharp move in oil prices, which rose approximately 75% over the quarter. Importantly, almost all of this increase occurred in March, following US military strikes that began on 28th February.
This late-quarter surge drove much of the market behaviour observed in Q1. Bond yields moved sharply higher as inflation expectations were repriced, while equity markets gave up the gains they’d made in February. Markets and sectors reliant on imported energy — particularly in Europe and parts of Asia — came under pressure, whilst energy independent markets – such as the US – fared better.
March, rather than the quarter as a whole, was the key inflection point.
Overreaction
The speed and magnitude of the oil move triggered a sharp repricing in interest rate expectations. Bond markets, which had entered the year anticipating rate cuts, moved quickly to price in the possibility of further tightening. UK government bonds fell around 4% in March alone.
This adjustment appears, in our view, somewhat overdone. While oil prices above $100 can raise legitimate inflation concerns, several factors suggest a more measured outcome is likely:
- Oil markets entered the crisis well supplied, with longer-dated prices remaining closer to $80 per barrel
- Longer-term inflation expectations remain well anchored
- The broader macroeconomic backdrop is materially different from previous supply-driven inflation shocks
The comparison with 2022 is instructive. At that time, UK inflation was already running at 5.5%, unemployment was near a 50-year low, and wage growth exceeded 6%. Today, inflation is closer to 3%, unemployment is at a five-year high, and wage growth has moderated materially.
Crucially, Bank of England base rates were just 0.5% in 2022; they are 3.75% today. Central banks were then behind the curve — today they have significantly more flexibility to respond to any slowdown in growth.
In short, this is a very different starting point.
Offsets
Despite geopolitical uncertainty, the fundamental backdrop for markets remains supportive.
US companies delivered their fifth consecutive quarter of double-digit earnings growth in Q1, with expectations for a sixth already forming as reporting season begins. This consistency of profit growth continues to underpin equity markets, even in the face of macro uncertainty.
Currency also provided a modest offset. The US dollar strengthened over the quarter — rising around 1% against Sterling and closer to 2% during March — providing some ballast to globally diversified portfolios with significant US exposure.
Credit markets remain notably resilient. Companies continue to access capital on favourable terms, with little sign of stress. This remains one of the more reliable indicators of underlying financial system health.
Within portfolios, Magnus have maintained a bias towards shorter-dated bonds, which are less sensitive to shifts in interest rate expectations. These bonds now yield in excess of 5%, offering a more defensive profile in an environment of shifting interest rate expectations.
Opportunity
Periods of volatility often create opportunity, and Q1 has been no exception.
Valuations in the US equity market have become more attractive. Price-earnings multiples have compressed, driven in part by strong earnings growth, leaving the market trading closer to its five-year average and some 10% cheaper than it was six months ago. The technology sector — which traded on around 27x forward earnings as recently as six months ago — now sits closer to 21.5x, despite expectations of c.37% earnings growth this year.
The UK market continues to stand out on valuation grounds. Trading on less than 13x forward earnings, it remains one of the cheapest major markets globally. Its sector composition — with meaningful exposure to energy, materials and financials — has also proven beneficial in the current environment.
Combined with ongoing share buybacks, stable earnings and improving international investor demand, this supports our continued tilt towards the UK within portfolios.
More broadly, Magnus is seeing active managers lean into quality — favouring industry leaders with strong balance sheets — while selectively adding to areas that appear to have been overly penalised during recent market weakness, including parts of the UK banking sector.
Risks
While markets have been resilient, risks remain.
A more prolonged disruption to energy supply would increase the likelihood of sustained inflationary pressure and could weigh on global growth. In such a scenario, earnings expectations — particularly in energy-importing regions and consumer-facing sectors — would likely come under pressure.
At present, markets appear to be pricing a relatively contained disruption. This is something Magnus continue to monitor closely.
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