Markets gauge war outlook between renewed threat and ceasefire effort
CIO Daily Updates
From the studio
From the studio
Thought of the day
Thought of the day
Investor sentiment remains cautious ahead of US market open on Monday as US President Donald Trump signaled further escalation in the Iran war after the downing of two US military jets on Friday. In a social media post on Sunday, Trump said Iranian infrastructure including power plants and bridges will be attacked on Tuesday if the Strait of Hormuz remains closed. He followed it later with another post that indicated a deadline of 8pm Eastern Time.
Iran rejected Trump’s latest ultimatum, saying the Strait would only fully resume operations when war damage is compensated. The Islamic Republic continued striking energy targets in Gulf states, including Kuwait’s oil headquarters. Israel, meanwhile, said it struck more than 120 air defense and missile systems in central and western Iran over the weekend, with the country’s defense minister threatening further attacks.
Brent crude oil rose near USD 112/bbl at the start of Asia’s trading day on Monday, before paring gains to around USD 109/bbl on ceasefire hope. Axios reported that the US, Iran, and a group of regional mediators are discussing terms for a potential 45-day ceasefire, and Reuters reported that Pakistan has put together a framework to end hostilities that could come into effect today and reopen the Strait. Reports that more ships passed through the Strait of Hormuz also helped sentiment. S&P 500 futures were flat at the time of writing.
With the outlook of the Iran war still highly uncertain, our message remains that by staying invested, diversifying, and hedging, we believe investors can navigate near-term volatility while capturing long-term opportunities.
A swift resumption of energy flows appears elusive at this stage. While reports on possible ceasefire aided investor sentiment, it remains to be seen whether an agreement acceptable to all parties can be reached quickly. With the US, Israel, and Iran showing little signs of backing down in latest comments, the path to a negotiated settlement appears limited, and investors should prepare for the possibility that the war could escalate before any meaningful de-escalation. Additionally, while OPEC+ on Sunday approved an increase in output quotas for May by over 200k bpd, the move is largely symbolic, given the heftier supply chain disruption. The oil-producing group added that damage to Middle East energy assets will have a prolonged impact on oil supply even after the conflict ends.
Investors can consider steps to progressively derisk portfolios the longer that oil prices remain high. We have highlighted that reducing portfolio risk likely entails an opportunity cost as equity markets are forward-looking. But if the disruption persists, higher energy costs could eventually feed through to consumer confidence and economic growth. With risk management and loss mitigation in mind, we would be selective around markets more vulnerable to elevated oil prices, while considering opportunities in more defensive markets with secular growth and limited exposure to energy disruptions. The prospect of a longer-lasting conflict also underscores the importance of diversifying beyond traditional asset classes, in our view.
Stay invested, and add hedges to boost portfolio resilience. Recent market swings in response to fresh headlines support a balanced approach to investing rather than a binary one, and we continue to advise investors against making large, abrupt shifts to their strategic portfolio allocation. Historical data showed that stocks tended to perform well after bouts of heightened volatility, and missing the best day’s performance would lead to around 10% less wealth. With stock markets having historically experienced more positive years than negative ones, the odds are more favorable for investors with longer timer horizons. Investors can also improve portfolio resilience by replacing a portion of direct equity exposure with structured investments with capital preservation features, or adding exposure to gold and broad commodities as hedges. We also see value in short-duration quality bonds if markets begin to price a higher risk of economic slowdown and associated central bank rate cuts.
Overall, we think investors should remain positioned for medium-term upside in global equities while continuing to diversify and hedge portfolio against the risk that energy prices stay higher for longer.