Where to invest in Q2 2026
As the conflict in the Middle East casts a long shadow over global markets, what are the best assets to invest in?
The end of the tax year is a great time to reset and revisit your portfolio’s composition and goals.
You might want to see how the stocks, funds and investment trusts you’re holding have performed, and if you have any of your annual ISA allowance remaining, now is the time to use it up (or lose it).
You can put up to £20,000 into ISAs, including stocks and shares ISAs, during any tax year, and this allowance will reset on 6 April.
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Stay invested: try to ignore the negativity
It is always tempting to join the rush to the exits at times of turmoil, as we’ve seen since the outset of the Middle East conflict.
But, as hard as it might sound, it can pay to overlook the short term disruptions, and stick to a disciplined, regular investment plan.
“Take a step back,” says Simon Nichols, lead manager for the BNY Mellon Multi-Asset Balanced fund. “Whenever these geopolitical events happen, we can all get really drawn into the 24 hour news flow. But we’re trying to concentrate on the longer term effects, and trying to avoid permanent diminutions in value, rather than trying to trade around short term tactical noise.”
Selling off can risk your portfolio missing out on key gains in the wake of bad news; so-called ‘relief rallies’.
“Markets tend to over-react in both directions as panic [and relief] set in,” says Nichols.
Selling off during the initial panic runs the risk of missing out on the relief over-reaction on the positive side. That can have damaging repercussions for your portfolio.
In order to strip the emotion out of your investment approach, it can be helpful to set up a regular drip-feeding of investments, possibly even scheduling regular deposits if your investing platform enables them.
That will help you avoid the temptation to try to time the market by selling at the peak or buying at the trough, feats which are notoriously impossible even for professional investors.
Which stock market sectors and regions should you invest in for Q2?
In terms of the sectors that have been, and could be, resilient to further geopolitical turmoil or an extension to the Iran conflict, the obvious contenders are the oil and energy sectors, as well as defence.
But these have already gained in response to the conflict – which may be coming to an end.
Nichols suggests that strong companies in sectors that have been sold off currently present buying opportunities for long-term investors.
“Where we have confidence that those companies, in some of those more affected areas, have got great longer-term business models, those are the areas that perhaps present opportunities in the market,” said Nichols. Sectors like industrials have been hit by the selloff, but according to Nichols there are still structural tailwinds that are favourable for the sector over the long term.
Wang believes that Japan is one region that could see continued returns from equities, largely thanks to ongoing reforms of the country’s stock market that are actively designed to return more capital to shareholders.
“The reform story is still very strong,” said Wang. “We think that governance reforms are going to help drive more share buybacks and dividends, and that’s going to help to increase shareholder return.”
Despite being so hit by the stock selloff following the outset of the Iran war that they were forced to implement stock exchange circuit-breakers, Wang is also bullish about South Korea and Taiwan. Both countries are key producers of some critical semiconductor manufacturing components.
“We were positive on Korea before this,” says Wang. “Now that it’s cheaper, we see it as a buying opportunity.”
Should you invest in bonds for Q2?
Historically, bonds were one of the best defensive assets for your portfolio. But over recent years, where most of the headwinds for stocks have taken the form of inflationary surprises, that hasn’t been the case.
“The thing that really hurts fixed income investors is longer-term inflation,” said Nichols.
Bonds and equities have instead been trading in the same direction as one-another. “We’re seeing that positive correlation between stocks and bonds, because the sell-off has been driven by oil and inflationary expectations,” said Nichols. “They should traditionally start to work again in an environment where it’s not inflationary-driven.”
But are they still worth allocating to in the current environment?
James Klempster, deputy head of multi-asset at Liontrust, believes that government bonds are the best store of value over the long term, despite recent volatility.
“We believe quality government bonds will remain an excellent store of value,” he said. “While inflationary spikes may cause prices to move down, more general risk aversion should lead to demand for these assets. This demand should pull down yields, increasing prices and therefore offering the potential for capital growth in times of risk aversion which is likely to be converse to the short-term performance of equity markets.”
How to protect your portfolio in Q2
In terms of equities that can weather the storm, Wang advocates a focus on ‘quality’ stocks; that is, those with strong earnings, low earnings variability, strong cash flows and good governance.
“These are companies that you know are going to do well, regardless of what happens, unless demand gets really, really destructive," she said. For her, that means US large cap stocks. “That tends to be a safe-ish asset within risky assets, where there are quality names.”
There is an argument, though, that US stocks are priced higher compared to their global counterparts, and as such potentially have further to fall during a downturn.
Klempster prefers relatively undervalued sectors and regions. These, he says, offer two potential advantages, compared to investing in pricier sectors. The first of these is their potential to be re-valued upwards, which would lead to gains.
“We saw this in the relative performance of the hitherto unloved UK stock market in 2025,” said Klempster.
The second benefit has to do with risk management. “Indices with less 'good news' in the price should, all else being equal, have less scope to disappoint than those with a lot of good news in the price,” said Klempster. “As a result, there is an argument that there is less optimism and therefore less potential for over-optimism in the prices of depressed value markets.”
Gold has, in recent history, acted as a bulwark against market downturns. However, the gold price fell 15% between the start of the Iran conflict and 20 March.
Despite structural tailwinds like central bank purchases remaining in play, Wang highlights gold’s volatility as one of its drawbacks in terms of protecting against downturns.
“The other issue [with gold] is that it’s a crowded trade as well,” she said. It could, however, continue to have value as a diversifier within a portfolio.
