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John:
I'm John Wyn-Evans, Head of Market Analysis at Rathbones.
Over the years my work has increasingly involved not only the analysis of economies and companies, but also politics and geopolitics – and that is certainly the case today.
This update comes at a time when media outlets are full of images of blazing oil facilities and shipping tankers, alongside official videos of missiles striking their targets. Although the United States has not officially declared war on Iran – the president did not seek congressional approval before launching strikes – we are effectively dealing with a war situation in the Middle East. Its progression and eventual outcome could have meaningful consequences for investment portfolios.
While our thoughts are with everyone affected directly and indirectly by these events, we must not let our focus shift from the responsibility of stewarding the funds entrusted to us. This does not mean reacting immediately to every news headline. As we’ve seen in recent weeks, financial markets have been experiencing “headline bingo”, with asset prices moving swiftly in both directions.
For example, earlier this week Brent crude oil saw the largest intraday trading range in history, rising close to $120 per barrel before falling back below $90. It is easy to be whipsawed in such conditions, which is why we remain committed to taking a longer‑term view. We regard ourselves as investors, not traders.
You will likely be familiar with many of the key facts surrounding these events, so this is not the place for deep forensic detail. However, it is important to explain why this particular conflict configuration has the potential to significantly affect economies and financial markets.
In recent years, whenever conflict has arisen in the Middle East, geopolitical analysts have quickly turned to a map of the Strait of Hormuz – the narrow channel between Iran and Oman. Around 20% of global oil supply passes through it each day. While shipping hasn’t seen severe disruption since the early 1980s, when Iran and Iraq were at war, the strait is now effectively, though not officially, closed to traffic. This raises the prospect of shortages not only of crude oil and refined products such as diesel and jet fuel, but also liquefied natural gas, fertilisers, and even aluminium.
The key question is how long this disruption will last. It is unclear what objectives President Trump must meet before declaring success, and equally unclear whether Iran will allow the situation to return to normal even if he does. There is, however, some room for cautious optimism: many parties have strong incentives to reopen the strait relatively quickly.
Iran itself depends heavily on oil revenues. The country is already in crisis, and losing export income from roughly three million barrels a day puts it in even deeper jeopardy. Its largest customer, China, is also highly reliant on imported oil and gas. Although China has over a billion barrels of stockpiled oil and can weather short‑term disruption, its long‑term interests strongly favour restoring supply.
The United States, despite being a net exporter following the shale boom, remains sensitive to global pricing. Petrol prices have already risen sharply, from $2.80 in mid‑January to around $3.60 today. Rising fuel costs were a liability for Democrats in the last presidential election, and with President Trump’s approval ratings already in decline, further increases pose risks to Republican prospects in the upcoming midterms.
Meanwhile, neighbouring Gulf states – arguably innocent bystanders – are being hit despite gaining nothing from this conflict. Attacks on infrastructure and threats to oil and gas revenues could force a reassessment of the region’s attractiveness as a growing hub for business and tourism. Beyond the Gulf, G7 nations (with the exception of energy‑rich Canada) remain vulnerable. Memories of the impact of Russia’s invasion of Ukraine are fresh, contributing to the coordinated release of 400 million barrels from strategic reserves to buy time.
In the UK, wholesale natural gas prices have doubled. Although households won’t feel the impact immediately due to the quarterly energy price cap, pressures could build later in the year. The government may again need to consider subsidies, as in 2022 and 2023, which would further strain public finances. Unsurprisingly, concerns about higher inflation and fiscal pressure have weighed on government bond prices. While markets recently expected two more Bank of England rate cuts this year, there is now even the possibility – still unlikely in our view – of a rate increase.
Investors also recall the difficult experience of 2022, when equities and bonds fell simultaneously. Some fears are understandable, but there are reasons for reassurance. Interest rates and bond yields are already far higher than in early 2022, making a repeat of that sharp repricing less likely. Additionally, inflation then was driven as much by excess demand as by constrained supply. That is not the case today. Higher energy prices now are more likely to divert spending away from other categories, slowing activity rather than overheating the economy. As a result, we see central banks delaying expected rate cuts rather than entering a new tightening phase.
Equity markets entered this period with relatively strong global economic momentum. Previous rate cuts had begun stimulating credit demand, and fiscal measures in countries such as the US and Germany supported activity. Global purchasing manager indices were trending upward, and economic surprise indices were positive. Corporate earnings have also been robust: US companies have significantly exceeded expectations, delivering around 14% year‑on‑year growth versus the 7% expected. Forecasts for 2026 pointed to double‑digit earnings growth in the US and Europe, and high single‑digit growth in the UK. Emerging markets and Japan were also projected to generate strong growth.
Despite this strength, markets have not been free of drama. Investors have questioned the likely returns on the vast capital expenditure going into AI‑related data centre construction. At the same time, software‑based businesses have seen their models challenged despite strong current profitability, resulting in sharp share price declines. We believe uncertainty about the pace and nature of technological disruption has led to all companies being treated alike, creating long‑term opportunities for more discerning investors.
Even with this uncertainty, many equity indices remain close to all‑time highs. Within markets, however, we’ve seen a pronounced rotation toward companies with tangible assets and lower risk of obsolescence – a trend someone has neatly termed “HALO”: hard assets, low risk of obsolescence. Energy and materials have led the performance tables, while technology‑linked sectors have lagged.
Looking forward, we are operating in a different market regime from the last 40 years – one shaped by heightened geopolitical tension and persistent inflationary pressure. Such events are difficult to predict and rarely advisable to trade directly. History shows that panic is rarely the right response; sticking to a long‑term investment strategy is usually far more effective.
However, geopolitical shocks sometimes act as catalysts for underlying risks. This typically happens through a spike in commodity prices or a sudden shift in risk sentiment. For now, the key question is how long energy markets remain disrupted.
Our advice remains to stick with long‑term strategies. Diversification can help cushion portfolios, and a tilt toward higher‑quality stocks, shorter‑duration bonds, and suitable diversifiers can play an important role in protecting capital. We have long believed that a bias towards quality pays off, and we expect such companies to be relatively resilient even if higher energy prices and interest rates weigh on disposable income.
Our strategic approach to fixed income – favouring shorter‑dated bonds – has been beneficial, helping avoid the larger losses suffered by longer‑dated instruments. This aligns with our broader view that inflation is likely to be higher and more volatile than in the pre‑pandemic era, with geopolitics as a key driver.
From a first‑principles standpoint, this conflict does not appear to benefit any party, suggesting some belief is warranted that things will not spiral into mutually assured destruction. That argues against materially reducing overall market exposure, particularly as any resolution could prompt a sharp rally. Regular savers should continue contributing, taking advantage of lower prices along the way.
Still, we should expect further short‑term volatility. The announcement that the late Ayatollah Khamenei will be succeeded by his son shows Iran remains defiant, while the US administration’s shifting and sometimes contradictory definitions of success give it room to declare objectives met and de‑escalate quickly. As we’ve seen with other decisions from President Trump, this could happen suddenly, leaving no time for investors to react.
In these circumstances it is important to stay vigilant and ready to respond. Sticking to long‑term strategies and maintaining well‑constructed portfolios remains the best way to navigate the turbulence ahead.
I'm John Wyn-Evans, Head of Market Analysis at Rathbones. Thank you for your time.
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