From the studio

Podcast: Signal over noise with Ulrike Hoffmann-Burchardi AppleSpotify (7 mins)
Podcast: Jump Start - your quick guide to the week of 30 March (7 mins)
Video: Top of Mind in Asia Pacific | Navigating the US-Iran conflict and oil shock (6 mins)
Video: UBS Explains | How OpenClaw, AI agents drive ‘super-exponential’ growth (3 mins)

Thought of the day

Equity markets declined and oil prices rose through much of last week as investors increasingly began to weigh the prospect of a longer-lived conflict and disruption to energy supplies, despite US President Donald Trump delaying his threat to destroy Iranian power infrastructure. Bond yields also rose in anticipation of potential central bank interest rate hikes to contain inflation, although yields did fall on Friday on signs on weakening activity survey data and US consumer confidence.

The risk-off trade has continued into Monday, led by declines for the Nikkei 225 (-2.8%) and Kospi (-3%). Brent crude oil was up 3% at the time of going to print, rising above USD 116/bbl, while the US dollar index was trading above 100 points. S&P 500 futures pointed to a 0.4% rebound after the index fell 1.7% on Friday. For the week, the S&P 500 fell 2.1%.

Trump on Sunday told the Financial Times his “preference would be to take the oil” in Iran, and he indicated the US could seize Iran’s export hub of Kharg Island if he so chooses. Alongside the threat, Trump also said he was “pretty sure” a deal with Iran could be reached, noting indirect talks were progressing and Iran had permitted 20 oil tankers through the Strait of Hormuz amid negotiations. Earlier, US Secretary of State Marco Rubio indicated in a congressional briefing that US forces "are going to have to go and get it,” in reference to nuclear material within Iran.

Meanwhile, two US Marine Expeditionary Units and troops from the 82nd Airborne Division are heading to the region, ahead of Trump’s latest deadline for Iran to open the Strait of Hormuz on 6 April. Separately, Iranian forces damaged a key US surveillance aircraft in Saudi Arabia. Iran-backed Houthi forces launched missile attacks on Israel, while Israel said it was actively degrading Iranian infrastructure "throughout Tehran."

What do we think?

With the Iranian regime still in place and holding de-facto control over the Strait of Hormuz, global energy inventories falling, and enriched uranium still inside the country, the path to a negotiated settlement acceptable to all sides currently appears limited. With this in mind, investors should prepare for the possibility that the war will escalate in the coming weeks before a path to de-escalation can become clearer.

For example, military action in the coming weeks to assert greater US or international control over the Strait of Hormuz could pave the way for a negotiated settlement, with potential international agreement over the security of the Strait and Iran agreeing to give up nuclear stockpiles in exchange for sanctions relief and sovereignty guarantees.

What to do?

In our CIO Alert "An investor’s guide to navigating the conflict" published 9 March, we laid out the dilemma that investors face and our approach for investing through the crisis.

We said that the longer the conflict lasts, the higher energy prices will rise, and the greater the negative economic and market consequences. At the same time, we noted that since equity markets are forward-looking, we would expect stocks to rebound swiftly once the Strait shows signs of re-opening. So reducing portfolio risk likely entails an opportunity cost.

To navigate this, we said that investors should not try to “trade” geopolitical events, but instead to stay invested while taking steps to progressively derisk portfolios the longer that oil prices remain high. Our goal, as we indicated at the outset, is not perfection, but risk management and loss mitigation.

In our CIO Alert published on 23 March, we recommended diversifying excess exposure to at-risk equity markets in favor of structural growth and defensive markets . We downgraded Europe, Eurozone, and India equities to Neutral and upgraded the more defensive Swiss equity market and the European health care sector to Attractive.

From here, the prospect of a longer-lasting conflict is heightening the vulnerability of portfolios solely made of stocks and bonds, with elevated return correlation between the two major asset classes potentially eroding traditional diversification benefits. This underscores the importance of diversifying beyond these asset classes, hedging, and progressive de-risking. As energy inventories deplete further, and oil and natural gas prices rise, government measures to limit demand (including rationing and energy conservation) and/or conserve supply (including export taxes or bans) may become more widespread.

As discussed in our latest CIO _Alert "_Use market bounce to diversify and hedge," we believe that exposure to potential gains in the US dollar, oil, and broad commodities can help hedge portfolios in the short term. We would also see medium-term value in gold and short-duration quality bonds if markets begin to price a higher risk of economic slowdown and associated central bank rate cuts.

We believe it remains crucial for investors to make incremental changes and not make large, abrupt shifts to their strategic investment strategies. With US domestic support for the war low and falling, and gasoline prices and interest rates rising, it also remains possible that Trump tries to force a quicker exit with a “declaration of victory.” Markets would likely take this as a short-term bullish signal (recall that the partial reversal of "Liberation Day" tariffs last year drove a roughly 10% one-day rally in the S&P 500), even if this leaves longer-term issues like the security of the Strait of Hormuz and Iran’s nuclear stockpiles unresolved.