Q1 2026 Macro Outlook: Investing in an Era of Persistent Geopolitical Risk

As we enter the second quarter of 2026, the global investment environment is being reshaped by a familiar but uncomfortable force: geopolitics. Renewed tensions in the Middle East, intensifying technology competition between the United States and China, and shifting alliance structures are reintroducing volatility into asset prices and forcing investors to reassess long-held assumptions about risk premia, supply chains, and capital flows.

For institutional investors with long time horizons and meaningful illiquid allocations, this environment is challenging but ultimately navigable. At Aethon Capital, we have managed capital through multiple periods of geopolitical stress over our nearly thirty-year history—from the dot-com bust and 9/11, through the Global Financial Crisis, to the post-2022 macro reset. Each period taught lessons that inform how we approach today's environment.

The first lesson is that geopolitical shocks compress decision-making time but do not change the fundamentals of disciplined investing. The businesses that performed well through previous shocks were those with pricing power, durable competitive moats, conservative balance sheets, and management teams capable of operational adjustment. Those characteristics are no different today.

The second lesson is that liquid market reactions to geopolitical events typically overshoot the underlying fundamentals, creating opportunities for patient capital. We are seeing this dynamic in several sectors today, where credit spreads have widened more than warranted by underlying credit fundamentals, and where equity valuations in cyclical sectors have repriced to reflect worst-case scenarios that may not materialize.

The third lesson is that geopolitics is not uniformly bad for all investments. Periods of geopolitical stress create winners as well as losers. Energy security investments, defensive consumer franchises, certain industrial categories tied to nearshoring and re-shoring, and gold and precious metals all tend to perform well when geopolitical risk premia rise. We are increasing exposure to several of these themes across our portfolio.

Looking specifically at the current environment, we see three structural shifts that are likely to persist regardless of how immediate tensions evolve.

**Energy security has become a strategic imperative.** The combination of Middle East tensions, the post-Russia rebalancing of European energy supply, and growing U.S.-China competition over critical minerals has elevated energy security from an abstract policy concern to an active investment theme. This is creating compelling opportunities in domestic oil and gas production in stable jurisdictions, in pipeline and LNG export infrastructure, and in nuclear power, where new construction and life extension projects are finally gaining traction after a decades-long dormancy.

**Supply chain reconfiguration is accelerating.** The era of optimizing global supply chains purely for cost is over. Companies and governments are now actively investing in supply chain resilience, redundancy, and geographic diversification. This is driving substantial real estate, manufacturing, and logistics investment, particularly in Mexico, Vietnam, India, and Eastern Europe.

**Defense and security spending is rising structurally.** NATO members have committed to sustained defense spending increases, and similar dynamics are playing out across Asia-Pacific and the Middle East. This is benefiting defense primes, specialty component manufacturers, and adjacent dual-use technology providers.

For our portfolio positioning, we are taking a balanced approach: maintaining our long-standing emphasis on high-quality businesses with pricing power, while selectively increasing exposure to themes where we expect geopolitical tailwinds to be most durable. We are also maintaining higher cash reserves than in recent years to capitalize on dislocations as they arise.

The most important point we communicate to our limited partners in this environment is one of perspective. Geopolitical risk has always been a feature of investing, not a bug. The decades during which it seemed quiescent were the historical exception, not the rule. The discipline, patience, and long-term focus that have always defined successful investing remain the right approach today—perhaps more so than at any time in recent memory.