The recent announcement of a two-week ceasefire initially led to a swift rebound in risk assets. However, optimism faded quickly as weekend talks failed to produce an agreement, and tensions reintensified with the announcement of a US naval blockade. Markets reacted swiftly: oil prices spiked above USD 100 per barrel and equity markets traded lower on Monday.
The situation remains highly opaque and, for now, continues to favour traders rather than long-term investors. Against this backdrop, our view remains unchanged: the current phase still calls for caution rather than courage. Patience is key. Our base case still points to a short-lived but intense spike in energy prices, although it remains to be seen whether the global economy and, in particular, energy markets have shifted more structurally than initially expected. What has improved compared to three months ago is the entry point.
Opportunities beyond the US amid heightened volatility
Several of our preferred non-US equity markets have corrected meaningfully, reinforcing our constructive stance on Japan, Germany, Switzerland, and emerging markets. These offer more attractive valuations and a better balance of cyclical recovery and structural growth drivers. In the meantime, investors can use the current volatility to refine their ‘shopping list’ for risk assets. We continue to highlight opportunities in Japan and emerging markets, alongside exposure to preferred sectors such as financials and healthcare.
Looking ahead, much depends on whether the current geopolitical fog begins to lift. If escalation remains contained and a global recession and/or a full-blown oil crisis can be avoided, we recommend staying close to our established playbook. Periods of market weakness should be used to rotate selectively into non-US equities and high-quality stocks.
Iran conflict: Why the energy supply shock remains contained for now
In true crisis manner, the Iran conflict delivers surprises and shifting dynamics every week. With its announced blockade, the United States aims to shift the Strait of Hormuz trade from Iranian into Omani territorial waters in order to defend the freedom of trade and curtail Iranian oil exports, which so far remain unhindered. Since the escalation of the conflict, the Strait of Hormuz has never been effectively closed, and trade has recently picked up again. This southern corridor was the main trade route during peacetime, with very few ships transiting since early March, while the northern corridor became the Iranian toll-controlled and safeguarded route, seeing growing transits since mid-March.
Given the US blockade and Iran’s pending response, it remains unclear whether the ongoing negotiations are irreparably failing and whether the ceasefire will soon collapse. Amidst this uncertainty and lack of visibility, it is worth focusing on the signposts laid out in our scenarios. A prolonged energy supply disruption is needed to lastingly unsettle the global economy, and serious infrastructure damage is required for such a serious disruption to energy flows out of the Middle East to materialise.
So far, the conflict has curtailed production and exports but has not caused serious and broad damage to energy facilities in the region. Among the crisis’s various surprises are the successful defence of infrastructure amidst the attacks and the swiftness and scale of the ramp-up of alternative energy export routes. Both materially limited the supply shock and provided time to re-tap global energy supply chains outside of the Persian Gulf. The US blockade seems to be part of the dealmaking phase. The conflict now seems to be approaching its peak. We leave our scenarios and related probabilities unchanged for the time being and still see oil and gas prices in the peaking phase of a temporary but very pronounced price spike.
Volatility without clarity: Why patience still pays
The quick take on current markets is simple: puzzled investors are best served by patience. The Iran war remains too opaque for clean long-term positioning and still feels more like traders’ land than investors’ territory. Our base case remains a short-lived but intense energy price spike, yet it is fair to ask whether the world – and energy markets, in particular – have changed more materially than expected. What has improved versus three months ago is the entry point. Several of our preferred non-US markets have corrected meaningfully, and we continue to favour Japan, Germany, Switzerland, and emerging markets, with a particular tilt towards financials, consumption, information technology (IT), and export-oriented sectors. In other words: keep drafting the shopping list, but do not rush to deploy it.
As for the latest events, the real surprise would have been an immediate agreement in Islamabad. That never looked realistic. More importantly, there is still no truly lasting damage to energy infrastructure, regardless of whether the Strait of Hormuz is formally blocked or merely functionally impaired. The latest CPI readings still point mainly to an ‘energy-only’ shock. If the Ukraine war is any guide, inflation could remain largely confined to energy costs rather than trigger a broad-based second-round spiral. That matters because it keeps the door open to some monetary easing, particularly in the US, even if central bank rhetoric stays alert.