Leading economic indicators continue to point to underlying resilience, but market-based measures of growth expectations and risk appetite have cooled.
The effects of the Iran war on private real estate are less about direct physical disruption and more about how geopolitical conflict transmits through the broader economy.
While higher energy prices are supportive for net energy exporters across emerging markets, the environment is challenging for energy importing Asian economies.
The latest news from the Middle East points to a ceasefire and the possible resumption of energy and goods flows through the Strait of Hormuz. But perennial themes such as diversification, defense, and discipline remain core to our investment conversations. Below, our investment experts discuss the implications of geopolitical risk and high energy prices on their asset classes, and how they’re managing portfolios in this environment.
The situation in Iran and the broader Middle East has implications for Asia and emerging market economies. The Strait of Hormuz is a critical artery for oil and gas transport to Asia and an important driver of energy prices. While higher energy prices are supportive for net energy exporters across emerging markets, the environment is challenging for energy‑importing Asian economies and has implications for inflation and the economic backdrop.
The oil market moving from an oversupply to tight supply, shaped by chokepoints, serves as a reminder of how quickly narratives can change. The lesson for us remains diversification and flexibility — maintaining exposure across geographies, styles and themes. But also remaining disciplined by leaning into new underappreciated opportunities as conditions evolve.
At present, our Asia and emerging markets portfolios have exposure to energy and net energy exporters and a significant underweight to net energy importers (India, Taiwan, Korea) where we believe valuations reflect too much optimism. However, as energy stocks outperformed tech by almost 20% in March1, the picture is now more nuanced — stock selection remains key.
— Ian Hargreaves and William Lam, Co-Heads of Asia and Emerging Market Equities
The effects of the Iran war on private real estate are less about direct physical disruption and more about how geopolitical conflict transmits through the broader economy. The most important channels are inflation expectations, interest rates, and investor risk appetite, all of which influence financing costs, valuation assumptions, and confidence among investors and property tenants. Depending on the duration of the conflict, real estate markets may experience delayed leasing decisions or slower transaction activity, even if longer‑term fundamentals remain intact.
From an operating perspective, the conflict’s effects are likely to be uneven across property sectors and markets. Changes in economic growth, trade patterns, and corporate cost structures can influence occupier demand, but these impacts tend to be more pronounced in certain property types and geographies than others. On the supply side, higher energy costs and disruptions to energy‑linked materials may raise construction costs or delay development timelines, potentially restraining new supply. For existing assets, reduced levels of new construction can help support occupancy and rent growth where demand remains resilient.
For investors, the current conflict reinforces the importance of disciplined underwriting, prudent leverage, and a focus on assets with durable cash flows. The longer uncertainty around the conflict persists, the greater the risk that leasing and investment decisions are delayed. At the same time, periods of slower capital deployment can create openings for investors willing to look beyond near‑term volatility in what remains a long‑term asset class.
— Mike Sobolik, Investment Strategist, Direct Real Estate, North America; Mike Bessell, Managing Director, European Investment Strategist
March saw a sharp return of fear and volatility following the US and Israel strike on Iran and the subsequent closure of the Strait of Hormuz. The spike in oil prices above $120 revived inflation concerns and interest rate volatility, leading to broad sell offs in cyclical holdings while energy stocks were bid up aggressively. The stark contrast between a rapid de-escalation and a prolonged disruption has been a reminder of how quickly market conditions can shift when geopolitical risks re-emerge.
The focus during the period has been on resilience rather than attempting to predict the path of events. A diversified approach centred on high‑quality businesses with strong balance sheets and proven management teams has been maintained. Activity has been measured rather than reactive. Exposure to oil was trimmed where share prices began to discount higher long‑term prices than expected, and exposure was reduced to parts of the AI and semiconductor complex where valuations and positioning have become more extended and the risk of capital misallocation has increased.
Looking ahead, we believe the most attractive opportunities are in businesses with durable competitive advantages, particularly those with unique data assets that can benefit from AI without requiring heavy capital investment. More broadly, recent events reinforce the need for diversification and flexibility. Both geopolitics and the scale of the AI investment cycle point to a wider range of possible outcomes, meaning careful risk control, disciplined capital allocation and a willingness to adapt will be critical in navigating the period ahead.
— Siddarth Shah, Client Portfolio Manager
Bond markets have been focused on the inflationary implications of an energy supply shock. As a result, interest rate expectations shifted materially upwards, leading to a sharp rise in government bond yields. Government bonds sold off immediately, reflecting the view that inflation and higher interest rates posed a greater threat than weaker growth, and there was little sign of a traditional flight to safety. Since then, government bond markets have remained highly volatile. By contrast, so‑called risk assets have been more resilient. While equities and credit markets have weakened somewhat, especially as the conflict has continued, the overall decline has been relatively contained. Credit spreads have widened, but not materially so.
Credit risk was selectively increased on market weakness, with additions focused on familiar issuers where pricing dislocated and supply was readily available. Some of these positions had already been under pressure prior to March, including areas affected by the AI disruption trade earlier in the year, such as consumer technology and data‑related names. Other exposures were added on an idiosyncratic basis. Overall equity exposure declined alongside the market but was modestly increased into the subsequent dip. Duration remains broadly unchanged.
Overall, this represents a weaker macroeconomic environment than at the start of the year. Inflation remains high enough that government bonds and duration are not providing an effective risk‑off hedge. However, central banks are likely to increasingly look through the inflationary impulse toward a weaker growth backdrop, particularly as labour markets were already softening prior to March. This contrasts with the post‑Covid inflation period of 2022–23. A renewed hiking cycle is not currently expected. All‑in yields appear attractive, although credit spreads remain relatively tight.
— Alister Brown, Senior Client Portfolio Manager
All asset markets have had a lot to deal with since the Iran conflict, UK and European equities are no different. This unexpected development has questioned the positive outlook for our asset class which has been emerging in recent times. As a result, markets have been very volatile, reacting to the latest development in the Gulf as it happens. It is difficult to know how this plays out: de-escalation, a step up in escalation (potentially followed by rapid de-escalation) or a prolonged period of uncertainty. Taking a step back, we’ve been struck by how markets appear ready and willing to embrace any positive news flow, leaving us with the impression markets could rebound strongly if an agreement can be reached between Iran and the US. What happened on the 8 April is a good example. On the announcement of a two-week ceasefire, the more sold-off markets like the MSCI Europe ex UK were +5% on the day.
This matters to us because it is a fluid situation and more volatility can’t be ruled out, but at the same time we’re cognizant of how markets are willing to jump on positive developments. This means we’ve not changed the overall shape of our portfolios very much. Going into the crisis we already had decent exposure to oil and gas stocks (a sector we believe others are less exposed to than us), which has been helpful for performance. Being underweight consumer discretionary, a sector which has really struggled, has also helped. Across our various funds, we have marginally reduced our exposure to utilities, an area which has performed well. At the same time, we’ve been adding at the margin to stocks which have been heavily impacted by the crisis but where we believe the medium to long-term fundamental opportunity remains positive. In terms of new positions entirely, there have been a few where again we feel the overall share price impact of higher oil or recession risk has been overly negative so providing an attractive valuation and where we believe the opportunity for improving returns remains.
Overall, as a team we are trying to be nimble in response to the volatility in the markets driven by the conflict.
The outlook for European equities was far stronger going into the US/Iran conflict than it had been since the Global Financial Crisis, supported by fiscal expansion, AI capex monetization and a strong consumer; the UK, a largely international stock market, had the appeal of low relative valuations. It is our belief that these markets could still generate good relative returns in the medium to long term and the conflict-driven volatility in share prices has provided interesting opportunities.
— Joel Copp-Barton, Senior Client Portfolio Manage
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