Volatile geopolitics, solid corporate earnings

Last week, the situation in the Middle East returned to the foreground. Markets reacted positively to a report suggesting that the US and Iran were close to agreeing an end to the conflict and setting a framework for more detailed nuclear talks. According to the report, Iran would pause nuclear enrichment, while the US would lift sanctions and release frozen Iranian funds. Both sides would also ease restrictions around the Strait of Hormuz.  

The prospect of lower energy risk and fewer trade disruptions was enough to shift sentiment quickly. Equities rallied across the board as fears of stagflation began to fade. Emerging markets equities led the move, helped by a weaker US dollar. Within equities, semiconductors continued to stand out. AMD gained after strong earnings driven by demand for AI agents, while Asian hardware companies such as SK Hynix, Samsung Electronics and SMIC also performed well. Government bonds joined the rally. With geopolitical risks seen as less acute, markets dialled back expectations of further monetary policy shifts. 

Overall, the move was supportive for our portfolios as we’re moderately tilted towards equities. We’ve kept this overall positioning throughout the recent bouts of volatility for two reasons. First, history suggests that geopolitical shocks tend to have a short-lived impact, as fundamentals often reassert themselves fairly quickly. Second, those fundamentals still look solid. The US labour market is holding up, and corporate profits remain strong. While first-quarter earnings cannot fully reflect the latest geopolitical developments, results so far point to a good degree of resilience. 

While the report of de-escalation supported markets, nothing concrete has been announced and there are still many open questions about whether a lasting deal is achievable. Tensions continue to flare up intermittently, and that argues for caution. This is why diversification remains central to our approach. It is the practical bridge between risk awareness and market participation. 

Last week was a reminder of how volatile the oil market can be when headlines dominate trading. The West Texas Intermediate (WTI), the US crude benchmark, fell almost 6% at one point, briefly slipping below USD 90 per barrel. The initial trigger was optimism around a possible reopening of the Strait of Hormuz. That move didn’t last. Prices then rebounded by nearly 10% on reports of renewed tensions between the US and Iran, slipped another 1.5%, and climbed again by around 2% once hostilities were confirmed.  

For any energy trader trying to time these swings, it would have been an exhausting week. This is exactly why we don’t chase headlines. We prefer portfolios that can work across scenarios, rather than positioning for a single forecast being precisely right. 

Looking ahead, in the absence of a durable peace agreement, we expect oil prices to trade within a range of USD 95 to 120 per barrel. If prices were to stay at those levels for more than two quarters, this would negatively impact growth, while increasing the risk of rising inflation and central bank rates. 

Beyond this, the supply side cannot be ignored. Shell’s CEO recently told investors that the global oil market is facing a supply shortfall of roughly one billion barrels, and that this deficit is growing each day the conflict continues. Not even a quick diplomatic resolution would translate into an immediate recovery in production. Damaged infrastructure and disrupted supply chains take time to repair. In addition, countries will need to rebuild their strategic inventories, which have come under pressure in recent months.  

For that reason, we do not expect oil prices to snap back to pre-conflict levels. Instead, once tensions ease, prices are more likely to settle in a lower but still elevated range, below USD 95 but above USD 75 per barrel.