Over the last two weeks, conflict in the Middle East has widened across multiple fronts, disrupting oil supply and regional stability. Markets are showing signs of stress – the oil price is on the rise, risk assets are under pressure, and investors’ nerves are being tested. Should this escalate to a state of panic and high volatility, we will look to take advantage by adding quality assets to clients’ portfolios at attractive prices.
We maintain our view that the most probable outcome is a contained conflict followed by a negotiated ceasefire. However, the situation remains fluid, and the facts on the ground may change quickly. As events evolve, so too may our investment views.
Oil price spike: why it matters
For now, the most immediate impact on markets is via energy. With the Strait of Hormuz – one of the main arteries of the global energy system – effectively closed, markets reacted to the supply shock and the oil price spiked within days. Brent crude is currently trading at US$100 per barrel and could reach levels of US$140 or more, should the closure persist for a sustained period and strategic reserves run low.
In our view, the key uncertainty is the duration of the closure. While markets seem to expect the strait to reopen once US strikes on Iran come to an end, recent comments from Iranian officials suggest the disruption may persist for longer than many anticipate.
A higher oil price affects far more than fuel – it ripples through all industries, leading to higher inflation globally. When energy becomes more expensive, consumers spend more on fuel and less on other goods, and businesses face higher operating costs. The result is slower economic growth, and in severe cases it can push economies towards recession. It also tends to trigger a ‘flight to safety’ in global markets, which is typically accompanied by higher volatility.
Defensive by design, prepared to pivot
Experience tells us that markets have not reached panic levels yet and are looking past the current oil price. We saw far higher levels of volatility during periods such as the Covid pandemic and the tariff-driven sell-off following US President Donald Trump’s ‘Liberation Day’ announcement last year. In both instances, dislocations in markets created opportunities, and we took advantage by adding equities to our portfolios at attractive prices.
Our clients’ portfolios are specifically designed to absorb shocks. Equity exposure across our strategies is deliberately defensive, and our balanced portfolios are designed to have multiple sources of uncorrelated returns. This stance helps to cushion portfolios when markets come under pressure, while also retaining capital to deploy if prices become sufficiently attractive.
Depending on how the situation in the Middle East unfolds, we may well pivot to a more aggressive stance to benefit as markets recover.
Volatility can create opportunities for investors with the discipline to act when others are retreating. Should conditions deteriorate further and asset prices move to sufficiently attractive levels, we are prepared to deploy cash and selectively add risk.
