Over the weekend, joint airstrikes by the US and Israel across Iran, which reportedly resulted in the death of Iran’s leader Ayatollah Ali Khamenei, have intensified conflict in the region. Ongoing exchanges between Israel and Iran, along with impacts on other Gulf countries, have contributed to heightened uncertainty.
While the humanitarian consequences of the conflict are significant, the anticipated economic impact remains limited. Our base case expectation is for only a brief disruption to global energy supplies. Any initial increase in oil prices is likely to ease once it becomes clear that supply disruptions are temporary, critical infrastructure remains intact, and military activity subsides. In this scenario, markets may experience short-term volatility but are expected to refocus on positive global economic fundamentals, consistent with the pattern observed after previous geopolitical shocks.
However, the onset of military action raises the likelihood of a less favorable scenario, where prolonged energy supply disruptions could have a more pronounced effect on the global economy and financial markets. Although it is too early to determine the full impact, elevated volatility is set to persist, especially since markets are also assessing the future of technology companies and how AI will disrupt companies and industrials.
In periods of uncertainty, a holistic approach to portfolio management—encompassing rebalancing, diversification, and appropriate hedging—can help manage risk and support long-term outcomes. Fixed income remains an important component of a balanced portfolio. For those with lower allocations to fixed income, current conditions may present an opportunity to increase exposure, especially as further monetary easing is anticipated in the US and UK, and income opportunities in Europe and Switzerland have become more limited.
Within fixed income, we prefer high-quality government and corporate bonds with medium durations (3-7 years). We expect these bonds to deliver mid-single-digit returns through a combination of yield and price appreciation. Returns from quality bonds should exceed those from cash, in our view, particularly in adverse scenarios where falling rate expectations drive bond prices higher. Diversification within fixed income remains a key strategy for navigating today’s uncertain environment.
We’re more cautious on the riskier segments of fixed income, such as high yield, due to historically tight spreads. Nevertheless, diversified fixed income strategies—combining investment grade, select high yield, subordinated, and emerging market debt—can offer enhanced return potential when managed with a focus on risk control.
In markets where bond yields are low or credit spreads are tight, income-seeking investors may find attractive opportunities in equity-based strategies, including dividend and options approaches. Switzerland stands out for high-quality dividend stocks, with yields just under 3% for the Swiss Market Index—well above local bond yields. Southeast Asia also offers appealing dividend yields.
