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CONTRIBUTORS

Michael Buchanan, CFA

Chief Investment Officer
Western Asset

Despite geopolitical tensions and the resultant volatility in energy markets, the global backdrop is supported by policy momentum and stable corporate fundamentals. A protracted conflict risks stagflation; however, economic and political incentives point to near-term de-escalation. In this environment, disciplined active management remains essential as we position portfolios to capitalize on selective opportunities across global credit, EM and structured sectors.
Michael Buchanan, CFAChief Investment Officer

Key highlights:

  • The Middle East conflict and resultant energy supply shock have spiked market volatility. Longer-term inflation expectations remain anchored for now, but rising near-term inflation expectations have tightened financial conditions via fears of central banks leaning hawkish. 
  • US growth remains resilient as the region is energy-independent while deregulation, tax refunds and policy support are also supportive.
  • Europe and the UK confront potential labor-market headwinds and are highly exposed to volatile energy prices, but fiscal measures in Germany may help to stabilize the outlook.
  • In Asia, China’s recovery remains policy-driven amid structural challenges, while in Japan, expansionary fiscal policy will likely lead to a steeper curve.
  • Credit fundamentals across IG and HY remain strong, with issuance elevated by AI-related capex, M&A activity and refinancing needs.
  • Securitized sectors—select parts of MBS, CLOs and CMBS—offer relative value despite pressure in consumer and CRE pockets.
  • EM continues to benefit from positive fundamentals while relative value varies between the local, corporate and sovereign markets.
  • Investor sentiment has stayed constructive, supported by strong fundamentals and appealing yields despite geopolitical and commodity-driven risks.

Overview

In this quarterly report, geopolitical tensions are the defining feature of the macro outlook with energy supply shocks expected to weigh on near-term growth and inflation. Before these pressures the global economic backdrop was gradually improving as fiscal support, easier finan-cial conditions and moderating inflation were helping to strengthen the 2026 outlook. We believe the drastic shift in central bank policy expectations is somewhat overdone and that longer-term growth and inflation targets are still attainable. In the US, policy tail-winds and deregulation will likely support activity despite signs of softer labor conditions. Europe and the UK are more vulnerable to volatile energy prices and face labor-market challenges but German fiscal expansion may offer some stabilization. China’s recovery remains policy-driven while Japan’s expansionary fiscal policy will likely lead to a steeper curve there. Credit markets remain supported by strong fundamentals and healthy de-mand, with issuance elevated by AI-related capex and M&A. Select parts of structured products and emerging markets (EM) also offer attractive relative value. Despite cross-currents from geopolitics and commodities, investor sentiment remains constructive.

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