Thought of the day

The US, Israel, and Iran have agreed to a two-week ceasefire, with Iran agreeing to open the Strait of Hormuz during this period. The truce marks a dramatic turnaround from the heightened tensions earlier in the week, when President Trump threatened that “a whole civilization will die” if an agreement was not reached by 20.00 ET on Tuesday.

Pakistan’s Prime Minister Shehbaz Sharif—who helped broker the truce—has invited Iranian and US delegations to meet in Islamabad on Friday.

In response, oil and gas prices have plunged; stocks, bonds, and gold have rallied; and the US dollar has weakened. At the time of writing, Brent crude is trading 13% lower at around USD 94.6/bbl. European and Asian stocks have risen, with the Stoxx Europe 600 and the Nikkei 225 trading up 3.7% and 5.4%, respectively, and S&P 500 futures are pointing 2.5% higher. Gold is up 2.3% to USD 4,810/oz, and the DXY dollar index is down 1% to 98.7.

What do we think?

On the positive side:

  • The ceasefire signals that both sides wish to avert a worst-case scenario of a prolonged closure of the Strait of Hormuz and further damage to civilian and energy infrastructure. Negotiating against a backdrop of a ceasefire, rather than conflict, should also help improve the probability of eventual agreement and reduce the probability of severe escalation. Like we saw after “Liberation Day,” temporary truces can also be extended.
  • The prospect of greater flow through the Strait of Hormuz should support sentiment in markets most subject to shortages, including those in Asia-Pacific and sectors exposed to diesel and jet fuel. The latest data had started to show larger inventory draws in Japan and India. While flows are unlikely to immediately and fully resume, and it will take time for products to reach end-markets, the re-opening could at least mitigate the most severe negative economic effects in certain regions and sectors.
  • The price of energy tends to have a non-linear impact on economic growth, with oil price levels above USD 150/bbl starting to have an exponentially negative impact. Oil prices now trading below USD 100/bbl (rather than around USD 120/bbl at times during the past two weeks) leaves markets and the economy more headroom before negative effects compound.
  • Moderately, but not dramatically, higher energy prices than pre-conflict levels should mean that central banks do not feel the need to increase interest rates, provided energy flows sustainably resume. A period of more moderate oil prices should also help reduce the risk of rising consumer inflation expectations.
  • The approaching US midterm elections, declining popularity ratings for President Trump and for the conflict, domestic concerns about higher gas prices, and criticism from some Republicans over recent rhetoric may increase President Trump’s willingness to strike a deal.
    However, several risks remain:
  • It is not yet clear how quickly, or to what extent, traffic through the Strait of Hormuz will normalize. It will take time for tankers not currently in the region to reroute. Tankers currently in the Strait that move oil out may be less willing to return as the end of the two-week ceasefire window approaches. If flows are disrupted again, energy prices could rebound quickly. Even in a constructive scenario, a full normalization of flow will take some time.
  • Damaged energy infrastructure needs to be repaired, it could take weeks or months to resume shut-in production, and operators may be hesitant to resume while continued passage through the Strait remains in question. With this in mind, it is unlikely that energy prices will fall back to pre-conflict levels in the near term, and this will weigh on growth. The current tightness in physical markets is exemplified by Dated Brent settling yesterday at USD 144/bbl. With oil futures pricing a return to sub-USD 80/bbl oil by later in the year, there is also scope for market disappointment if prices stay higher for longer.
  • We note that Iran’s Revolutionary Guard has stated that passage through the Strait of Hormuz can only be conducted “in coordination with Iran’s armed forces.” It is not clear if Iran will retain de-facto control over the Strait and/or if it wishes to charge vessels for passage. Either way, it is likely to prove a point of contention in negotiations.
  • Any individual strike on a passing vessel could unravel progress. With this in mind, it is crucial that all armed members/units of the Revolutionary Guard adhere to the ceasefire. A breakdown of internal order within Iran presents a potentially uncontrollable longer-term risk to energy flow.
  • We also note that President Trump’s demands for limits on Iran’s nuclear programs have not been agreed, nor have Iran’s demands to lift sanctions, guarantee long-term security, withdraw US troops from the region, and for Israel to cease hostilities against regional proxies. Indeed, Israel has already stated that the ceasefire “does not include Lebanon.” Negotiations in Pakistan, starting on Friday, may start to unveil some of these differences. Any resolution that does not cover Iranian nuclear enrichment and ballistic missile programs may present longer-term risks if the US or Israel in the future perceive that nuclear threats are growing again.

What should investors do?

Since the beginning of the conflict, we have advised long-term investors to stay invested, avoid making abrupt shifts to strategic portfolio allocations, and not try to “trade” geopolitical events. The dramatic diplomatic and market turnaround over the past few days is another example of the importance of that.

The ceasefire is clearly a positive development and could presage a sustainable end to the conflict. At the same time, various issues remain unresolved, so investors should be mindful of the potential risk of re-escalation. Oil prices will remain the key barometer of economic and market risks and will continue to guide our positioning with respect to the conflict.

Capital preservation. We continue to expect equities to end the year higher than today’s levels, and the ceasefire supports that case. Our recently revised year-end target for the S&P 500 is 7,500 (+10% from current levels), with projected earnings per share growth of 11% this year. Investors looking to position for upside while protecting against potential re-escalation can use a period of lower implied volatility to engage in strategies that offer exposure to upside alongside a degree of capital preservation.

Our preferred regional equity markets include the US, Switzerland, and emerging markets. At a sector level, our preferences include health care, industrials, and US utilities. We also think investors should consider opportunities to build exposure to select stocks exposed to secular trends such as artificial intelligence , power and resources, and longevity.

Gold. Gold prices remain well below where they were at the start of the conflict (about 10% lower than on 2 March). Over the medium term, if the market shifts toward pricing less risk of rate hikes, while geopolitical and fiscal risks stay high, we would expect gold prices to rise again. We target USD 5,900/oz by year-end and see the metal as a valuable portfolio hedge.

Quality bonds. Despite today’s sharp rally in bonds, yields remain considerably above pre-conflict levels, with markets still pricing some residual risks of central bank interest rate hikes. Today’s sharp reversal in energy prices, if sustained, should limit inflationary risks, and we think that markets could start to refocus on potential US rate cuts later in the year. This presents an opportunity for investors to diversify portfolios with quality bonds. We favor short- and medium-duration maturities.

Broad commodities. The sharp sell-off in energy prices presents an opportunity for investors to enter into broad commodity positions as a hedge against re-escalation or disappointment in the pace of energy flow resumption. We see structural appeal across the commodity complex, given low energy inventories, demand for industrial metals stemming from infrastructure and electrification spending, and the appeal of precious metals as hedges against geopolitical and fiscal risks. We continue to favor an active approach.

Alternatives remain valuable in long-term portfolios, offering differentiated returns and diversification beyond traditional assets. Select hedge funds can enhance diversification through lower correlations, active risk management, and adaptability to changing macro and geopolitical conditions. Private market strategies may also provide longer-term income and additional diversification. Investors, however, should stay selective and align allocations with their liquidity needs and risk objectives, using liquid strategies for flexibility. They should also be aware of the unique risks involved in investing in alternatives, including illiquidity, a lack of transparency, and potentially high fees.