Tensions in the Middle East have escalated, disrupting energy supply and pushing oil prices higher. While markets currently expect this to be temporary, sustained higher energy prices could add to inflation and weigh on growth. Portfolios remain well diversified, with positioning designed to navigate a range of outcomes in what may remain a more volatile environment.
Escalation in the Middle East has led to attacks on energy infrastructure and the effective closure of the Strait of Hormuz, disrupting around 20% of global supply and driving oil and gas prices higher. Sustained higher energy prices could lead to increased inflation and, in turn, higher interest rates. The key word is sustained.
At present, markets expect this to be relatively short-lived. While we have seen some weakness in both bonds and equities, markets are not showing signs of major stress and continue to anticipate a resolution over time, with energy prices easing. More meaningful economic damage tends to occur when energy prices remain elevated for a prolonged period, leading to higher inflation and slower growth.
There are, however, some important differences compared to past shocks. Oil intensity – the amount of oil needed to generate economic growth – has more than halved since 1970. This reflects improved energy efficiency, less reliance on heavy industry, and a more diversified energy mix, including nuclear and renewables.
There are similarities to 2022 following Russia’s invasion of Ukraine, but inflation was already elevated at that time (around 5-7% across developed markets), driven by post-COVID demand, supply constraints, and strong labour markets, while interest rates were near zero. Today, inflation is closer to 2-3%, and interest rates are significantly higher. In addition, governments now hold strategic oil reserves, which can help stabilise supply and reduce the severity of short-term price spikes, as seen in 2022.
That said, if oil prices were to remain in the $100–120 range, this would likely add to inflation and weigh on growth, with the impact increasing the higher prices move and the longer they remain elevated.
Portfolio Update – We are closely monitoring developments, but portfolios remain well diversified, with positioning designed to help navigate a range of potential outcomes, while recognising that markets may remain volatile. This is reflected in exposures across the Aspen portfolio range, including: – Inflation-linked bonds, which can help protect against rising inflation.
– A shorter-duration bias, which reduces sensitivity to higher interest rates.
– High-quality government bonds, which provide diversification and income, and can help support portfolios during periods of weaker growth.
– Broad global equity exposure, ensuring diversification across regions and reducing reliance on any single market.
– Equity tilts towards value, quality and minimum volatility, which have tended to be more defensive in periods of higher inflation and market uncertainty.
– Exposure to real assets, including infrastructure and commodities, where appropriate, which have historically been more resilient in inflationary environments.
Bottom Line
Our positioning supports resilience and allows us to remain measured in fast-moving markets, while retaining the flexibility to make changes, where appropriate,
as the outlook evolves.