Quarterly Asset Class Analysis: Where We See Value Across Markets

Overall, based on our asset class and stock-level valuation pillars, we view US equities as Moderately Unattractive. 

Our methodology is based on our intrinsic valuations of the 700+ stocks we cover, and as of March 23, we calculated that the US equity market was trading at a price/fair value estimate of 0.88. This reflects that the market is trading at a 12% discount to our fair value estimates. Moderating our equity analysts’ bottom-up view is the fact that US Equities, in aggregate, are over-earning their history and are richly valued. Profit margin and returns on equity are at their 99th percentile historically. 

Likewise, traditional valuation metrics appear stretched with the broad market’s price-to-earnings multiple at its 86th percentile historically. Small-cap stocks continue to appear more attractive than large-caps from a bottom-up and top-down lens; however, large-caps have increased in relative attractiveness following the first-quarter selloff. 

• Much of the AI optimism might already be priced in.
• The next leg higher likely depends on clearer proof that AI spending drives revenue growth and efficiency.
• Elevated oil prices could pressure guidance and margins if they persist.

Relatively attractive sectors: 

• Communication Services, Consumer Cyclicals, Financials, Healthcare 

Consumer Cyclicals stand out to our Equity Analysts:  

• Median stock trades at a 14% discount
• Travel & leisure: 21% discount
• Apparel: 34% discount
• Macro uncertainty has created selective entry points

The Morningstar China Index closed the quarter down 7.5%. The key negative drivers were the risks of the Iran war and AI’s business disruption on media, gaming, and software companies. While the March plenary session unveiled little to further support domestic consumption, the market was not expecting much, and the reaction has been limited. As a result, outside a market-cap-weighted 13% decline for the Communication Services sector on the SaaS selloff, and an almost 24% gain in energy names, inclusive of the state-owned telecommunication and oil & gas companies, other sectors saw limited reactions. 

The broad market remains close to fairly valued. Chinese airlines, which don’t hedge jet fuel costs, were sold down by almost 25% on the Iran war risks. On the positive side, China’s electric vehicles are seeing increased export demand which has helped lift share prices of the leading brands and battery makers. The Consumer and Communications sectors are relatively undervalued. 

• We maintain a Neutral view. 
• Consumption indicators are slowly improving: 
• Youth unemployment easing
  • Wages rising in the “new economy”
• Property price declines are moderating, which may help rebuild confidence. 
• Policy support remains modest, keeping upside measured.

European stocks started 2026 strong but proceeded to fall after the Middle East conflict. Year-to-date, European equities are down 4%, but considering all the volatility, this is not a terrible result. The broad market grew earnings by 1%, saw P/E multiples contract by 4%, delivered a cumulative dividend yield of 1%, and saw a stronger US dollar reduce investor return by 2%. 

From a valuation perspective, the index is now trading at an 8% or so discount to our fair value estimate, the cheapest entry point available since Liberation Day last year. 

• Overall view: Neutral 
• Higher inflation may force tighter monetary policy, slowing growth. 
• Lower starting valuations help offset macro risks compared with other developed markets.

• We remain Neutral on UK equities.
• Inflation pressures—amplified by higher energy prices—may delay or reverse expected rate cuts.
• Slower growth remains the key risk.

Japanese equities sold off by ~9% on the Iran war but given solid gains prior, and Prime Minister Takaichi’s resounding general election win, the Morningstar Japan Index closed the quarter with a 1% gain. 

We believe the deeper selloff relative to China was due to potentially material risks if the energy disruption is extended, given: 

1. Japan’s reliance on imported fossil fuels for its energy needs 
2. 60% of its naphtha (processed-crude derivative) supply comes from Qatar, which could affect its production of petrochemicals. 

However, 250 days of strategic oil reserves help mitigate this risk, and the government has said that it will hold energy tariffs at their end-2025 level. The pullback has allowed valuations to return to a more reasonable level, but we still see the market as fairly valued. 

• Neutral overall, with emerging opportunities: 
  • Communication Services
  • Technology and consumer stocks
  • Semiconductor names after the selloff

• Wage growth may help offset higher rates in 2026. 
• Dividend growth is likely to matter more than buybacks.

Australian equities had a strong start to 2026, buoyed by firming commodity prices and solid company results through the February reporting season. This all came unstuck in early March at the onset of the Iran war. Brent crude surged from roughly $70 per barrel to above $100 in a matter of days, and by quarter-end, the Morningstar Australia Index had fallen 9% from its February peak. That opened a rare window of value, with more than half of Australian stocks in four- or five-star territory, the highest proportion since the April 2025 tariff selloff. 

However, equities have since clawed back much of their losses, and the “value opportunity” is thinning out again. Looking across styles, the technology selloff, driven by fears of AI disruption, has compressed the long-standing premium of growth over value, leaving both styles similarly priced for the first time in years. Small caps remain deeply discounted to large caps, reflecting a flight to quality as investors navigate an uncertain macroeconomic environment. 

• Moderately Unattractive overall 
• Valuations are again above fair value, limiting forward returns. 
• Small caps remain deeply discounted relative to large caps.

Developed-market government bonds started 2026 positively, with income driving early returns amid easing expectations, particularly in the US, as growth momentum softened. This backdrop shifted sharply after the Iran conflict, triggering a broad repricing of inflation risk and term premia, which led to losses. 

US curves flattened as rate-cut expectations were unwound, a pattern mirrored across core markets. UK gilts saw pronounced pressure at the front end as markets priced aggressive tightening, while European yields drifted higher with French bonds underperforming on fiscal concerns. Australian bonds sold off on stronger inflation and labor-market data, and Japanese bonds lagged as long-dated yields rose to multi-decade highs amid further Bank of Japan normalization. 

• UK gilts and Australian government bonds stand out on valuation. 

• Volatility may persist, but yields now offer better compensation for risk.

US TIPS outperformed nominal Treasuries in the quarter as a spike in energy prices caused breakeven inflation rates to widen. US Agency MBS started the quarter strong as the administration’s $200B purchase program announcement pushed spreads lower. However, heightened rate volatility and spread widening due to the Iran War acted as headwinds in March. 

Municipal bonds delivered poor performance across both investment grade and high yield, as rising yields weighed on total returns. Strong investor demand helped absorb another quarter of heavy issuance driven by state-level infrastructure projects. 

• TIPS remain a useful hedge against energy‑driven inflation. 
• Investment‑grade munis look Neutral, with value in the 15–20‑year range. 
• High‑yield munis remain less attractive despite higher yields.

2025 was a stellar year for credit markets, characterized by solid total returns and sustained spread compression toward historical tights. The Iran conflict in Q1 2026 shifted the narrative sharply, with oil supply disruption, inflation fears, and broader geopolitical stress pushing core rates higher and triggering a reversal across all credit asset classes. 

US assets proved relatively resilient: US IG lost only -0.4%, US HY -0.5%. EMD bore the brunt of the sell-off, with hard currency down -1.9% and local currency off -2.2%, reflecting direct conflict exposure and hydrocarbon import dependency for some of the issuers in the universe. 

• We prefer shorter‑duration exposure given macro uncertainty. 

• EM local‑currency debt remains relatively attractive, though valuations are less compelling than a year ago.

• Recent repricing has created a Moderately Attractive entry point, especially at the front to intermediate maturities.

• Yields embed a sizable uncertainty premium that may ease over time.

• Sterling remains sensitive to energy prices and global risk sentiment.

• Long‑term valuation support exists, but structural headwinds keep conviction moderate.