Iran conflict: remain anchored
in fundamentals

Supportive macroeconomic backdrop

There’s no doubt that the sharp moves in oil prices over the past month, renewed geopolitical risk and a shift towards ‘stagflation trades’ have created a much more uncertain near-term investment environment.

However, it will serve investors well to step back and take a broader perspective on the current landscape. It should be noted that heading into the Iran conflict, the global economy was showing clear signs of reacceleration. Leading indicators – including the US Purchasing Managers’ Index (PMI) and Organisation for Economic Co-operation and Development (OECD) composite measures – pointed to improving growth momentum, underpinned by both monetary and fiscal easing.

At the same time, corporate fundamentals remained robust. Earnings growth was picking up, supported by resilient demand and improving productivity. A key structural driver has been the ongoing investment cycle in artificial intelligence (AI), which continues to reshape industries and enhance efficiency.

Across sectors – from industrials to services – companies are already reporting tangible productivity gains from AI adoption, enabling cost efficiencies and reinvestment into innovation and customer engagement. Notably, early concerns around widespread labour disruption have yet to materialise, with little evidence of meaningful employment weakness in sectors exposed to automation.

From a macroeconomic perspective, this combination of rising productivity and stable labour markets is inherently disinflationary and supportive of both equities and bonds over time.

At the same time, before the current hostilities, policy settings were becoming more accommodative. Fiscal support – particularly in the US – was increasing, while central banks have been easing over the past year as inflation pressures moderated. Taken together, this creates a favourable backdrop for both growth and asset prices, assuming a relatively short conflict.

Emerging markets, too, were showing signs of renewed strength. China’s policy focus on supporting consumption and stabilising growth, alongside improving fundamentals across many emerging economies, was reinforcing a more constructive outlook. Importantly, valuations remain attractive relative to developed markets, providing an additional tailwind for long-term investors.

Wide range of potential outcomes

The present situation in the Middle East has introduced a new and significant risk, centred primarily on energy markets. The sharp rise in oil prices reflects not a fundamental shortage of supply but a logistical constraint stemming from disruptions in the Strait of Hormuz – a critical artery for global energy flows.

This distinction matters. A temporary disruption may generate volatility and near-term inflationary pressure, but it doesn’t necessarily derail the broader economic cycle. That said, the range of potential outcomes remains wide.

At one end of the spectrum, a relatively swift resolution – through ceasefire or de-escalation – could see oil prices normalise quickly. In that scenario, markets would likely recover strongly, supported by the favourable macro environment that prevailed before the conflict started.

At the other, a more severe escalation – such as a prolonged closure of the Strait of Hormuz or direct damage to regional energy infrastructure – could push oil prices materially higher. Our analysis suggests that while oil at around US$100 per barrel may be manageable for the global economy, a move towards US$150 would pose a far more meaningful risk to growth and consumer spending.

For now, markets appear to be pricing in a relatively contained outcome, with disruptions expected to be resolved within weeks rather than months. This leaves room for further downside should events deteriorate beyond current assumptions.

Correction within broader bull market

Despite recent volatility, it is important to keep market moves in perspective. The drawdown in global equities has so far been modest relative to historical episodes. In past instances, similar shocks have tended to trigger sharp but short-lived sell-offs, with markets recovering well before the underlying tensions are fully resolved.

Crucially, the fundamental drivers of the current cycle remain intact. The business and earnings cycle is reaccelerating, and recession risks appear contained. This points more to a correction within an ongoing bull market than the start of a more sustained downturn.

Importantly, today’s inflation dynamics differ markedly from those seen in previous energy shocks. Inflation was already moderating before the conflict, with both wage growth and services inflation trending lower. This affords central banks greater flexibility to respond to any economic slowdown, reinforcing the resilience of the cycle.

A ‘barbell’ approach

While the long-term outlook remains constructive, the near-term environment is marked by heightened uncertainty, calling for a balanced and disciplined approach to portfolio construction.

From an asset allocation perspective, diversification remains critical. The current landscape underscores the value of exposure to multiple sources of return – spanning equities, fixed income and alternatives.

Within equities, a ‘barbell’ approach continues to make sense. On one side, high-quality growth companies – particularly those leveraged to the AI investment cycle – remain well positioned to benefit from structural tailwinds. On the other, select ‘old economy’ sectors such as industrials, materials and energy offer a degree of resilience in a world of higher commodity prices and elevated geopolitical risk.

In fixed income, periods of rising yields driven by geopolitical shocks may present opportunities to add duration. Should the conflict ultimately weigh on growth, or if any inflationary spike proves transitory, bond yields are likely to retrace, creating scope for capital appreciation.

Emerging markets remain another area of opportunity, particularly where valuations are compelling and fundamentals are improving. While the near-term ‘fog of war’ may delay inflows, the structural case remains intact.

Opportunity to add risk

Periods of geopolitical stress are uncomfortable but not unusual. History shows that markets tend to recover from such shocks, often more quickly than expected.

Our central view is that while the Iran war can inflict short-term disruption – particularly through energy markets – it is unlikely to persist long enough to alter the global economy’s longer-term trajectory. Political constraints, including the impact of higher energy prices on consumers and electoral pressures, may also act to limit the duration of more extreme outcomes.

As a result, significant market drawdowns should be viewed as opportunities to add risk rather than as signals to retreat.

Remain anchored in fundamentals

In periods of uncertainty, it is easy to become absorbed in short-term narratives. However, successful investing demands discipline and a clear focus on long-term fundamentals. The global economy entered this phase of conflict with solid momentum, supported by policy easing, technological innovation and resilient corporate earnings. While geopolitical risks may introduce volatility, they have not, thus far, undermined that foundation.

Our approach remains consistent: invest in high-quality businesses at attractive valuations, maintain diversification across geographies and asset classes, and use periods of weakness to add to long-term positions.

Uncertainty will persist in the weeks ahead. For patient investors, however, it is often precisely these moments that present the most compelling opportunities to deploy capital and enhance long-term returns.