Article first published in The Business Times on 27 March here
How long will the conflict in Iran last? This is the single - and simple - most important question investors are asking right now.
A quick and speedy resolution would trigger a powerful snap back in risk appetite, akin to the equity surge that followed “Liberation Day”. Conversely, the longer the conflict drags on, the worse the outcome for both the global economy and global markets.
Worryingly, the balance of risks is tilting towards the gloomier scenario.
All wars are foggy, and this one is more so than most. On one side stands a hollowed-out regime fighting for its very existence and ostensibly willing to do whatever it takes – including escalating the conflict to a regional level – to remain in power.
On the other side are a global superpower and a regional superpower enjoying carte blanche, at the military level, to do whatsoever they choose.
On that basis, the calculus is simple: the superpowers win.
Yet, that view overlooks the conflict’s equally important second and third-order effects.
Skyrocketing oil prices exert upward pressure on inflation, downward pressure on growth and prevent – or at least delay – US interest rate cuts. The widely perceived affordability crisis in the US thus worsens, with uncertain consequences ahead of the November midterm elections.
If you were US President Donald Trump, would you prioritise the war with Iran now or the battle for domestic votes later? Our sense is that the latter matters more.
At Lombard Odier, our base case remains that the conflict will be of limited duration, with de-escalation expected in four to six weeks
The fog of war also extends to hazy disconnects in the markets. While the price of Brent crude has increased almost 44 per cent since the outbreak of the war, developed-market equities – in relative terms – have barely moved.
Indeed, as at Thursday (Mar 26), the S&P 500 was still only some 5 per cent away from its all-time high. In other words, markets appear conflicted, or perhaps complacent.
Yes, the supply and transportation of oil to the global economy face clear and present danger, but the extent to which that directly and immediately hits growth and earnings in corporate America is less certain.
To be fair, developed equities ex-US have corrected a little more meaningfully in recent days. Emerging markets – particularly those in Asia – have responded more quickly and, I feel, more appropriately.
Asia is the most exposed region to any disruption in oil supply, given its acute lack of domestic energy sources (Malaysia is perhaps excepted).
Consequently, emerging and Asia-focused markets have fallen some 5 to 9 per cent since the crisis erupted on Feb 28. Even emerging markets seem to be looking through the shocks.
Gold’s reputation as a geopolitical hedge has also been underwhelming. Where investors would normally have anticipated a safe-haven rally, the opposite occurred: Its price fell 15 per cent between the outbreak of war and Mar 25, dropping from US$5,278.90 an ounce to US$4,506 an ounce. Why?
I do not believe there is a single cause, but rather a multitude of factors: a resurgent US dollar pricing out foreign buyers; real yields rising as the Federal Reserve’s rate trajectory is repriced; a liquidity squeeze triggered by the rout in emerging markets; and – my favourite – aggressive profit-taking after the metal’s epic and meteoric rise in the past six months. (For a number of quarters, gold’s performance and reputation were akin to that of a meme stock.)
Regardless, gold’s reputation as a safe harbour in turbulent geopolitical times has taken a battering.
Yet, do I think the gold price will be higher in 12 months? Absolutely.
We remain fully invested and constructive and continue to anticipate positive economic growth and further market upside for the rest of 2026 as greater clarity emerges
Read more about the Artificial Intelligence cycle and investment insights from our recent webinar by the Investment Strategy team here.
At Lombard Odier, our base case remains that the conflict will be of limited duration, with de-escalation expected in four to six weeks. The economic, financial and political consequences in the US are simply too serious for it to be otherwise.
That said, we anticipate considerable volatility in the interim and have therefore revised our macro scenarios to incorporate higher near-term energy prices, now assuming an average of US$90 a barrel over the next six months.
This adjustment implies modestly lower growth and higher inflation in major economies – notably lifting US 2026 inflation to 3 per cent and real gross domestic product growth to 1.9 per cent.
Yet, the overall environment would be viewed as far from recessionary.
Central banks, including the Fed, are now expected to adopt a more restrained stance, with only one Fed rate cut projected for 2026; the Bank of England, European Central Bank and Swiss National Bank are likely to hold policy steady.
In light of elevated geopolitical uncertainty and reduced visibility, we have tactically lowered risk exposure. We have reduced our allocation to emerging market equities from overweight to neutral – shielding recent gains and holding the proceeds in cash – thereby bringing overall equity positioning to neutral levels. All other asset classes remain unchanged.
Despite this prudent de-risking, we remain fully invested and constructive. We continue to anticipate positive economic growth and further market upside for the rest of 2026 as greater clarity emerges.
As ever, we are monitoring fast-moving developments closely and stand ready to act when visibility improves.
Source: The Business Times © SPH Media Limited. Permission required for reproduction.
Read more about our Asia CIO’s take on Chinese equities into 2026 here.
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