How to deal with unquantifiable short-term risks

Markets were stood on their head by the geopolitical shocks of the first quarter. The Mag 7 stocks, which outperformed broad markets in 2025, declined sharply as value displaced growth as the dominant investment style.

The conflict in Iran was the key catalyst for this turbulent start to the year, creating a spike in oil prices and lifting commodity-linked markets. While markets overall fell during the quarter, energy supply constraints, rising energy demands, and a more defensive investor posture created highly beneficial conditions for energy stocks.

More generally, the rotation from growth to value reflected shortening investor time horizons amid heightened uncertainty. “Despite these challenges, we remain encouraged by the operational execution of portfolio companies and the forward earnings potential of the deep-moat businesses we own,” says Sanjay Ayer, portfolio manager of the WCM Select Global Growth Equity Fund.

“At the end of last year, we predicted that global equity markets would be shaped in 2026 by complexity, rather than a single, dominant narrative,” he added. That is, investors relying on binary frameworks risk missing out on opportunity sets.

That view has not changed. “If anything, it has been reinforced as we move through a headline-rich start to 2026,” said Sanjay.

Indeed, the challenges facing investors are shifting rapidly. Today, the task is navigating an environment where the range of outcomes is unusually wide.

Where in the range we end up will depend heavily on the trajectory of two significant global forces: AI and geopolitics. For both these forces, long-term outcomes are difficult to predict with confidence, yet too consequential to ignore.

Uncertainty is becoming structural

The newness and unpredictability of these global forces creates the possibility that elevated uncertainty is not temporary, but structural, Sanjay notes.

This is not necessarily a negative: opportunities grow when performance diverges. Divergent performance actually benefits consistent frameworks that are focused on selling stocks near value estimates and reinvesting in stocks trading well below them.

With this in mind, the extreme divergence seen in the first quarter is remarkable. The 50th-best stock in the S&P 500 outperformed the 450th-best by some 44 percentage points, a gap not seen since the Covid shutdown in early 2020.

Sector dispersion was similarly wide: energy stocks rose sharply, while software declined. As Bill Nygren, portfolio manager of the Harris Associates US Value Equity Fund, points out: “Accordingly, we sold primarily in energy and industrials and redeployed capital primarily into software and financials.”

Outlook: resilience masks underlying vol

Overall market and economic resilience were foundational themes of the first quarter, according to Soliane Varlet, portfolio manager of the Mirova Global Sustainable Equity (GSE) fund. Although inflation in the US held above the Fed's 2% target and employment worries deepened, consumers continued to spend, she notes. At the same time, corporate earnings expectations remained solid on average.

However, market and economic resilience may have masked underlying volatility in the market, which may break out at a later date. There is no obvious off-ramp or long-term solution to the joint offensive against Iran by the US and Israel. As such, the potential medium- to longer-term disruption to trade dynamics amid the blockade of the Strait of Hormuz is unquantifiable.

Given limited visibility and limited direct impact to its portfolio, combined with its long-term investment approach, Soliane has not made major shifts in the portfolio in the wake of the Iran conflict. “Through periods of uncertainty and volatility, we maintain our disciplined investment process and our long-term focus,” she says. 

The GSE portfolio is well balanced, with exposure to defensive sectors like healthcare and utilities, alongside cyclical/growth names in information technology and industrials. The portfolio also demonstrates a strong quality bias.

“This positioning helps us navigate diverse market environments,” Soliane adds. The GSE team continues to assess the potential impact on each company’s fundamentals, on valuations and on the overall positioning of the portfolio, considering different scenarios and incorporating new information as it comes.

Long-term drivers have not gone away

While GSE has made minor adjustments for elevated risk, its core focus remains on long-term trends and growth drivers. Despite recent market uncertainty, these key themes persist. The key trends and drivers include longevity and ageing populations, and the rise of generative AI.

Some themes have even strengthened as a result of recent geopolitical events. For example, the themes of deglobalisation and shifting power dynamics have become more influential.

As a result, Soliane sees increased focus on security by countries and industries, in areas such as energy and water, supply chains and cybersecurity. These areas should be of interest to all long-term investors.