How AJ Bell portfolios performed in the first quarter of 2026

Throughout March, we’ve seen the effects of the US-Iran conflict trickle down through the market, most prominently through the rise of energy prices and a shift in interest rate expectations. As it remains unclear when the conflict will be resolved, markets are now feeling the knock-on effects of higher oil and gas prices. Costs for businesses and consumers are likely to go up, and central banks might be forced to keep interest rates higher for longer to fight inflation.

Before the crisis began in March, markets had expected rate cuts – now there is talk of rate hikes. Fortunately, AJ Bell portfolios were well positioned for the impact. Some of the biggest drops in the market, such as in European shares and long-dated bonds, make up a relatively small part of our portfolio. And other areas where we have larger holdings than average, such as UK shares and short-dated bonds, weathered the storm well.

Depending on what you hold in your own portfolio, the impact of shares and bonds on your investment will be slightly different. Generally, changes in bonds make a bigger difference for cautious investors, while the importance of shares rises for those with a more adventurous approach.

What’s happening with stock markets?

To understand what’s going on with stock markets, it’s important to consider not just what happened in March, but January and February as well. Performance in the US stock market struggled in the first quarter of the year – and it didn’t just begin after the conflict in Iran. The US market had made smaller gains in 2026 before the conflict began, so the impacts of the war meant returns quickly dove into the negative, despite higher energy prices having a smaller impact on the US than some other nations.

Two areas that have done well in the US are the energy and utilities sectors, which have been boosted by higher oil prices. In January, we increased our exposure to the energy and utility sectors, well-timed to benefit from higher returns especially as other areas of the market, such as tech, struggled.

A brighter spot for the quarter was the positive return from the UK market. It started strong, with the flagship FTSE 100 index reaching a new high the day before war in Iran began. The presence of BP and Shell in the UK market has been a massive boost, as the companies’ share prices performed well following the beginning of the conflict. The UK economy is, however, sensitive to the potential of rising inflation and rising interest rates.

A controlled amount of inflation isn’t problematic for stock markets, as companies typically pass down the cost to consumers. But when inflation begins to run rampant, it can become a bigger problem.

The best performing stock region of the quarter came from investments in emerging markets excluding China, which rose nearly 5.2% in the quarter.

The main performance push came from Korea, although it has been volatile since the war began. A strong start to the year by electronics group Samsung and semiconductor company SK Hynix helped emerging markets power through. There’s lots to watch, as this market has a large exposure to tech and IAI which have been in and out of favour with investors in recent months. In addition, many of these countries have a high reliance on the Middle East for energy, which likely means more volatility ahead.

What the war has meant for bonds

Inflation and interest rates are two of the most important factors when it comes to the price of bonds, which means the past month has meant a lot of change for the sector. This has also presented some opportunities.

People often hold bonds in their portfolio for stability, so it’s understandable that market unease might have put people on edge.

The rise in energy prices suggest we could see a spike in inflation. Central banks typically hold or raise interest rates in this situation, and that has led to a shift in interest rate expectations and a repricing in the bond market.

While corporate bonds have had a smoother journey, they were still negatively affected as uncertainty within the economy has risen.

The current situation is more nuanced, because there’s no certainty about how long the war will continue, so markets don’t know how much interest rates may rise or for how long. Typically, when it comes to bonds, longer term debt (five years and up) pays out more because there’s a longer amount of time for risk.

This is where we’ve made some changes. We mostly hold short-dated bonds, but have bought more of these in the UK, US, Germany and France to take advantage of higher yields with the money we were holding in cash. Although the yields of the government bonds have already increased to reflect the expected interest rate rise, the rate of cash will not move until the interest rate rise is officially put in place by central banks. This means higher yields on low-risk investments, sooner, and if interest rates don’t rise, we will see capital values do so.

What we’re watching out for

There’s a lot of possibility for change, but the good news is that analysts are aware of the risks and possible outcomes for the market. This means that to some degree, these possibilities are already being reflected in stock and bond prices.

Central banks seem aware of the risks of inflation and look eager to stamp it out as soon as possible, even if that means putting up interest rates. One risk is being too aggressive with interest rate hikes and causing a sharp slowdown in economic growth. Policymakers face a delicate dance of keeping inflation manageable for people, while not creating an interest rate environment that dissuades business from borrowing money to support their growth plans.

In the near term, oil prices are likely to remain key for both inflation dynamics and market sentiment. Beyond energy, however, the conflict has reinforced a broader reassessment of supply chain vulnerabilities, defence spending trajectories, and energy security – themes that are likely to shape investment narratives well beyond the immediate volatility.

The more awareness there is of these risks, the better, and it’s being discussed on a global scale. When it comes to our investments, we’ll keep with our usual strategy: stay calm, follow the strategy, and keep our eyes open for opportunity.

The value of investments can go down as well as up, and you may not get back your original investment.

Past performance is not a guide to future performance, and some investments need to be held for the long term.