Barometer: Iran conflict demands earnest reassessment of active positions

Asset allocation: profound uncertainty

The Iran war has created a state of profound uncertainty for investors.

Every new tweet on President Trump’s Truth Social platform pulls markets in a different direction, often violently. We are told the US is deep in negotiations with Iran over reopening the Strait of Hormuz—through which 20% of the world’s oil supply passes—only to then discover that the US is building up its military presence in the region.

On another day, the US announces that the bombing campaign will escalate, only to later say it will be winding down.

Then there is precedent: the US president tends to reverse course (the “Trump Always Chickens Out”, or TACO, trade) in response to a negative market reaction.

In this environment, long‑held assumptions about the behaviour of different asset classes no longer apply. In normal times, developments that are bearish for equities tend to support bonds.

This time, however, both asset classes are struggling. There is no obvious safe harbour.

Making matters more complicated, the potential consequences of the war do not appear to be fully reflected in the market’s fear gauge. The VIX volatility index is only in the mid‑20s—a relatively modest reading given the circumstances.

We are less sanguine. Because we do not believe it is possible to gauge how or when this conflict will end, we are willing to take a back seat until the crisis resolves itself. As a result, we take a neutral stance across all three major asset classes. President Trump’s unpredictability makes it impossible to take a rational view of markets over the coming weeks.

Fig. 1 - Monthly asset allocation grid
April 2026

Geopolitical uncertainty has already begun to have a negative impact on the economy, our business‑cycle indicators show. Business surveys have started to tumble as purchasing managers recalibrate expectations in light of higher oil prices, while the data we monitor suggest that the wider market is too optimistic about the US economy and too pessimistic about most of the rest of the world.

There is a consensus view that, because the US is now entirely energy self‑sufficient, it is largely immune to the oil‑price spike triggered by the Iran war. But that is mistaken. For one thing, oil prices are global: just because the US covers its own demand does not mean petrol and other fuel prices are not rising there.

At the same time, the US economy had already been slowing by the time the first bombs dropped, with a very low savings rate unable to support growth (see Fig. 2). The result is an increased risk of stagflation. We expect US inflation to run at 3.3% this year, compared with a consensus forecast of 2.7%, while we see growth running at a below‑trend 2.0%, versus market expectations closer to 2.5%.

Europe is likely to prove more resilient than markets anticipate. Yes, the single‑currency region depends on oil imports. But European economies are less oil‑intensive than the US, while a substantial proportion of their energy needs is met by renewables.

Emerging markets (EM) are also more stable than they were during the 2022 oil price spike. Our forecast for their growth gap over developed markets has not changed materially, while we expect EM inflation to remain within central‑bank targets. Even China, where more than a quarter of its oil needs pass through the Strait of Hormuz, is in a relatively secure position, thanks to its substantial oil reserves.

Fig. 2 - Energy shockwaves felt in US
US real interest rate, employment growth and excess savings*

Our liquidity indicators show that the multi‑year global central‑bank easing cycle is winding down. Even before the Iran crisis, our view was that the US Federal Reserve had no need to ease policy, notwithstanding the central bank’s bias towards lower rates.

That view has not changed: US private‑sector credit creation remains robust, with no slowdown in bank lending or securities purchases, and the latest financial‑sector data suggest no negative impact from Iran so far.

China is the other source of easier liquidity, with Beijing maintaining a policy of moderately looser monetary conditions alongside active fiscal policy, designed to lift the economy out of its deflationary doldrums.

Elsewhere, however, there is a more hawkish tilt. As recently as January, the European Central Bank was pointing to the possibility of further monetary easing during the year.

Now, given the inflationary consequences of the oil‑price shock, we think there is a risk the ECB becomes the first among major central banks to tighten policy—particularly if governments decide to subsidise fuel, as they did in 2022.

Our valuation indicators have undergone significant shifts over the past month, though the absence of extreme valuation signals offers little that is actionable. Inflation fears driven by higher oil prices have pushed bond yields up, leaving prices at a neutral level. A sell‑off in equities means they are now only slightly expensive, while commodities remain very expensive.

Our technical indicators paint a positive picture for riskier asset classes, with equities supported by seasonal factors and a bearish tilt in investor positioning. Although our indicators for US equities have eased back, there is no sign that the market is set to capitulate. Investors were well hedged heading into this crisis, while retail investors continue to buy on dips. 

Equities regions and sectors: Chinese resilience

The Iran war and the energy crisis it has triggered have clouded the outlook for global equities. As it is impossible to accurately predict the conflict’s resolution or its impact across regions, we are moving our equity allocations back to benchmark weightings across most markets, preferring to avoid tilting positions until geopolitical uncertainty clears.

Chinese stocks are an exception.

We expect companies in the world’s second‑largest economy to have greater capacity than most to absorb external shocks. China has already built up some of the world’s largest stockpiles of oil and other vital commodities, while also securing access to alternative energy supplies from countries such as Russia. Its rapid adoption of renewable energy and electric vehicles in recent years should further help to cushion the blow.

Expansive monetary and fiscal policy should underpin domestic demand, while rising exports linked to AI‑related technology demand, alongside stronger industrial and upstream manufacturing activity, should continue to support Chinese equities.

For these reasons, we remain overweight Chinese stocks.

Outside China, emerging‑market (EM) equities appear more vulnerable. In our analysis, a 50% rise in oil prices lasting four months would deliver a particularly damaging economic blow to net oil importers such as Thailand, Korea, India and South Africa, weighing on GDP growth and external balances.

At the same time, a broad appreciation of the dollar would tighten financial conditions in these markets, as it raises imported inflation and encourages capital outflows. Against this backdrop, we reduce our EM equity allocation from overweight to neutral.

Fig. 3 - No place to hide
Global stock sector returns since outbreak of Iran war, %*

We have also shifted our sector allocation to a more defensive stance. We have upgraded utilities, which not only benefit from stable demand across economic cycles and in volatile markets, but are also set to gain additional impetus from electrification and policies aimed at energy independence.

We remain overweight healthcare, a defensive sector that screens as the most attractive on our valuation scorecard. Healthcare stocks are also likely to benefit from AI‑driven innovation, which should help cut costs and improve efficiency.

We downgrade consumer discretionary stocks to underweight, as any spike in inflation would weigh on real incomes and discretionary spending. Moreover, the US personal savings rate had fallen to 4.5% as of January 2026—the lowest level in nearly four years, according to the St. Louis Fed—as households run down their pandemic‑era cash buffers, a trend that spells trouble for the sector.

Our overweight stance in technology remains unchanged.

The recent correction in these stocks has brought valuations down from expensive levels, while AI‑related investment in data centres and digital infrastructure—expected to total around USD 600 billion this year alone—should continue to support demand for hardware and semiconductor companies.

Fixed income and currencies: risk mitigation the priority

Anyone hoping fixed income markets would provide shelter from the sell‑off rippling through equities will be disappointed. But there are clear reasons why bonds are currently moving in lockstep with stocks.

When a military conflict precipitates an energy crisis, the threat of stagflation hoves into view—an outcome that is negative for both fixed income and equities. As Fig. 4 shows, the threat of inflation has seen bond markets shift from pricing in interest‑rate cuts just a few weeks ago to hikes.

By our reckoning, if the oil price settles at current levels, it will add an average of 0.5% to inflation and reduce global growth by 0.5%.

The trouble is that it is difficult to use this as a guide to tactical allocation. The price of crude—and, by extension, expectations for inflation and growth—could move considerably above or below these levels; it all depends on how quickly the conflict raging in the Middle East ends.

Fig. 4 - Rate change
Market implied change in policy rate over the next 12 months (percentage points)

As we have no clearer insight than other market participants into how the war will unfold, we believe it is prudent to move our bond allocations back to benchmark weight. This has involved shifting our stance on US Treasuries from underweight to neutral. This move partly reflects the fact that US Treasury yields have already risen and that the Fed has a dual mandate: it is as attentive to inflation as it is to any deterioration in the labour market, which in our view limits the scope for any further sell‑off in US bonds.

We have also reduced our allocation to emerging‑market local‑currency sovereign and corporate debt from overweight to neutral.

Separately, we have reduced our allocation to gold from overweight to neutral. The precious metal has fallen by around 15% since the conflict began, as central banks that have accumulated large profits from their gold holdings have sold some of their reserves to fund additional spending on energy and defence.

That is not to say we have no defensive positions. We have increased our exposure to the Japanese yen to overweight and retain a higher‑than‑benchmark allocation to the Swiss franc—currencies that we believe have scope to appreciate if the conflict continues.

Global markets overview: in the red as war rages

Global markets were mired in a sea of red in March. With the US and Israel attacking Iran on February 28, a war is now raging across the Middle East,  threatening global supplies of everything from oil to food and raising the prospect of stagflation worldwide. 

Asset class prices see-sawed as investors scrutinised each military action and each political statement for clues on how long the conflict might last.

Fixed income, equities and precious metals ended the month with substantial losses, leaving investors with few places to hide.

Oil surged, breaching USD 100 a barrel for the first time since Russia’s invasion of Ukraine in 2022. Overall, it gained approximately 36% on the month,¹ but the level of volatility within that was just as unusual. A third of the trading days experienced moves of 6% or more in either direction.

Governments, businesses and households fretted about fuel shortages following the near closing of the Strait of Hormuz – the passageway for around 20% of the world’s oil and liquefied natural gas (LNG) supply.

As a result, energy was the only equity sector not in the red, with gains of around 8%. At the other end of the scale, materials and mining were down 15% and 20%, respectively, as investors fretted about the war’s impact on the global economy.

Fig. 5 - Oil spike
Brent crude oil price (USD/barrel)

Overall, global equities were down 6% in local currency terms, with losses across all major countries and regions. Global bonds lost 2% in aggregate. Within fixed income, there were signs of rotation from high yield credit to government bonds. Emerging markets were hit relatively hard, hurt by concerns about global trade and weaker currencies.

Traditional safe havens offered little respite. US Treasuries lost 2%, with concerns about the inflationary impact of the war and about its cost. Market expectations on US rates flipped sharply. Just before the war, they had been positioned for one or two more Fed cuts during 2026; now they are braced for the possibility of a hike.

Higher real yields, in turn, tarnished the appeal of real assets. Gold, which had enjoyed strong gains since the start of 2025, dropped around 16% on a wave of profit-taking. Flow and sentiment data suggest that investors turned to cash instead.

Conversely, the dollar benefited from weaker Treasuries and changing US rates expectations. The greenback added 1.4% versus a basket of major currencies, flirting with one-year highs.