Executive Summary
Global equities remained positive in February, with emerging markets outperforming their developed counterparts, led by strong gains in South Korea and Taiwan. However, the performance of markets in the first two months of 2026 has quickly become irrelevant as markets are now adjusting to the ongoing geopolitical conflict between US-Israeli forces and Iran, which is expected to have wider global implications. One of the key uncertainties surrounding the current conflict is how long the conflict could last, considering the absence of ongoing peace negotiations. Energy disruption is another key aspect to watch for, owing to the closure of the Strait of Hormuz, the primary conduit for 30% of the global seaborne hydrocarbon trade. The Federal Reserve will face a genuine dilemma in managing a stagflation situation. In a scenario where inflation spikes, the Fed will have to abandon its rate-reduction cycle and start increasing interest rates to manage the inflation. Developed market equities will experience short-term volatility but may soon brush it aside and move forward, while emerging markets, being sensitive to oil imports, may see deeper corrections and drawdowns. The way forward will depend on how power shifts in Iran, which is now the biggest unknown in the equation.
