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The US and Iran have announced an agreement to reopen the Strait of Hormuz and extend the ceasefire for 60 days, in a meaningful de escalation of the Middle East conflict
While several key questions remain unresolved, a partial recovery of energy and shipping flows through the Strait should be enough to avoid damaging shortages for the global economy
The agreement reinforces our base scenario of de-escalation and our forecast of an average oil price of USD 90/barrel over the six months since the start of the conflict. Our 12-month price target remains USD 78/barrel
We keep our macroeconomic forecasts unchanged and retain a moderate pro-risk stance in portfolios, anchored in resilient earnings growth and tilted towards emerging market assets.
The US and Iran have announced a diplomatic breakthrough in the Middle East, with an interim agreement to reopen the Strait of Hormuz and extend the ceasefire by 60 days. We maintain our macroeconomic forecasts and a pro-risk stance in portfolios.
The US and Iran have indicated that a memorandum of understanding ending the hostilities in the Middle East has been agreed. The text will likely be signed in Switzerland on 19 June. Without an official text, details remain unclear, but indications are that as well as re-opening the Strait of Hormuz after almost four months, the ceasefire will extend to all fronts, including Lebanon. The US will commit to non-interference in Iran's internal affairs and withdraw its forces from the surrounding region. Around USD 24 billion in frozen Iranian assets should be released over the 60-day period and Iran will reaffirm its commitment not to produce nuclear weapons.
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The interim agreement will leave some key questions unresolved, including the future of Iran’s nuclear ambitions for civilian purposes and the scale of the removal of sanctions on the country. However, a gradual reopening of the Strait removes the largest constraint for the global economy and oil markets.
A gradual reopening of the Strait removes the largest constraint for the global economy and oil markets
From an economic perspective, the question is how quickly flows can recover. Our base case remains that around half will return over the coming weeks, enough to avoid further damaging shortages. Full replenishment of oil reserves will take time, lasting well into 2027. We still expect Brent crude oil prices to average USD 90 per barrel over the six months from the start of the conflict, with oil futures prices now very much in line with our expectations. Our 12-month forecast assumes prices fall to USD 78/barrel.
Indeed, shipping activity in the Strait had already increased in recent weeks and some supply offsets have helped to contain oil prices. China has lowered its oil imports by more than 5 million barrels per day, easing pressure on global balances, while Saudi Arabia and the United Arab Emirates continue to operate pipelines to bypass the Strait. Additional logistical options will become available as confidence improves.
Shipping activity in the Strait had already increased in recent weeks and some supply offsets have helped to contain oil prices
Keeping a pro-risk stance
The news of an initial agreement reinforces our base scenario of conflict de-escalation. As such, we keep our key macroeconomic and market forecasts unchanged. The global energy shock following the Middle East conflict has already had a significant impact, raising inflation and lowering growth prospects. However, we still expect the world economy to grow by just under 3% this year, and the US economy in particular has proved resilient.
This economic resilience underpins our expectation of continued robust corporate earnings growth, and our moderate pro-risk stance in portfolios. The eventual de-escalation should favour a broadening of the equity rally towards more cyclical sectors, while declining inflation expectations should improve the return outlook for bonds.
Economic resilience underpins our expectation of continued robust corporate earnings growth, and our moderate pro-risk stance in portfolios
After the recent sharp equity market rally, we have lowered our view on the technology sector to neutral and have raised financials to a preferred sector, alongside utilities and healthcare. We remain overweight in equities via emerging market stocks, and maintain a neutral overall stance on fixed income, where we prefer emerging market debt in hard currency to developed market sovereign bonds.
Within developed market equities, we continue to overweight Japan and now also prefer more small-cap exposure within US equities. Small caps should benefit from resilient US economic growth, broader earnings leadership, and eventually lower interest rates, while their valuations are still well below those of developed market equities.
As highlighted in our recent CIO Office Viewpoint, global equities should continue to outperform fixed income assets, although sovereign bonds yields are now offering attractive yields, and within developed market government bonds we favour 5-7-year maturities in the UK, euro area, Australia and Switzerland, and 5-year US Treasuries.
Global equities should continue to outperform fixed income assets
A sustained de-escalation in the Middle East conflict would build conditions for a broadening of the equity market rally and improve investor sentiment. However, risks of renewed escalation remain if negotiations falter or regional tensions resurface. We keep our portfolio positioning unchanged for now and continue to monitor developments closely.
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