War in the Middle East drives market sentiment
Since the start of this month, the war in the Middle East has set the tone for global financial markets. Investors are particularly concerned about persistently high oil and gas prices and their negative impact on the economy. The heavy concentration of energy infrastructure in countries around the Persian Gulf, combined with Iran’s effective closure of the Strait of Hormuz — preventing almost all oil and gas exports from the region — plays a crucial role. As long as this narrow waterway, through which 20–25% of global oil and gas consumption is transported, remains closed and Iran continues to attack energy facilities in the region, oil and gas prices are likely to remain high or rise further, increasing the economic damage.
Sharp market moves; oil and gas prices surge
Financial markets are reacting strongly to news headlines. Reports pointing to escalation trigger ‘risk‑off’ moves, while news suggesting a swift end to the conflict has the opposite effect. This is not an environment for major investment decisions. The most pronounced moves are in energy prices, where traders have priced in a substantial risk premium. Brent crude has risen by more than 40% this month, while European gas prices are up more than 65%. Day‑to‑day price swings remain large.
Oil and gas price in perspective
US equities limit the damage
Equity markets in Asia and Europe have been hit hardest. The Stoxx Europe 600 index is down more than 8%, the MSCI Japan index has fallen 10%, and other Asian markets are down more than 8% on average. By contrast, the US S&P 500 index has declined by just over 4% so far (in local currency). These differences are understandable: disruptions to oil and gas supply pose a far greater problem for Asia and Europe, which are heavily dependent on imports, than for the US, a net exporter of oil and gas.
Because the US dollar has strengthened by around 2% against the euro, the decline in the S&P 500 measured in euros is limited to just over 2%. This is beneficial for the equity portfolios of our investment strategies, which in many cases consist of around 65% US equities. The MSCI All Country World Index is down nearly 5% in euro terms so far in March.
Investors adjust expectations for central banks
Bond markets have also seen significant volatility, with government bonds failing to provide shelter. Yields on government bonds in both the US and Europe have risen sharply, as investors fear higher energy prices will push inflation higher. Expectations for central bank policy are being repriced at speed. Markets are no longer pricing in a rate cut by the US Federal Reserve this year. For the European Central Bank, a rate hike in April is even being priced in. We consider this highly unlikely, as the expected increase in inflation is driven by a supply shock. Central banks can only influence demand, not supply. We therefore expect both the ECB and the Fed to remain on hold for the time being.
Sharp rise in yields in Europe and the US
Short‑dated yields, which are closely linked to policy rates, have risen the most. Germany’s two‑year yield now stands at 2.61%, 65 basis points higher than at the end of February. The ten‑year yield has risen by 38 basis points this month to 2.99%, the highest level since July 2011. In the US, the two‑year yield is at 3.96%, up 56 basis points since the end of last month, while the ten‑year yield has increased by 43 basis points to 4.38%. The MOVE index, a measure of volatility in the US Treasury market, reached levels last seen in April last year during the ‘Liberation Day’ turmoil.
Gold fails to act as a safe haven
Rising yields are not only negative for bonds — prices and yields move inversely — but also put pressure on equity valuations. Part of the equity market decline can be attributed to this. Gold, another asset sensitive to interest rates and central bank expectations, has also come under pressure. The gold price has fallen 16% this month. For a long time, gold had benefited from rising geopolitical tensions and expectations of US rate cuts. That support has now faded. Higher yields make bonds more attractive as a safe haven, while gold offers no coupon. Investors may also have taken the opportunity to lock in profits after the price doubled since early 2025.
Economic impact remains difficult to assess
There is no shortage of forecasts regarding the duration of the conflict and its economic impact, but the reality is that no one knows. Scenarios are therefore being revised continuously. What is clear, however, is that the longer the conflict persists and the Strait of Hormuz remains closed, the greater the economic damage will be. Persistently higher energy prices translate into higher costs for consumers and businesses, upward pressure on inflation and downward pressure on economic growth — in other words, stagflation. Our economists have lowered their growth forecasts for the major economies this year by several tenths of a percentage point.
Eurozone companies grow more pessimistic
The first effects of the war are visible in the preliminary purchasing managers’ indices, a key indicator of business confidence. The eurozone PMI fell to 50.5 in March, the lowest level in ten months. While the figure still points to modest growth, it marks a clear deterioration from February’s 51.9. Before the outbreak of the war, sentiment among European companies had been relatively positive. Growth was holding up reasonably well, and expectations of additional government investment had fuelled hopes of an industrial recovery. That optimism has now taken a hit. Companies report rising input costs and a more cautious outlook. Notably, manufacturing is holding up better than services: the manufacturing PMI remained broadly stable at 51.7, while the services PMI fell from 51.9 to 50.1.
This once again highlights the eurozone’s vulnerability. Energy‑intensive industries face a more challenging recovery, while higher fuel prices may make consumers more cautious. Whether the economy rebounds will largely depend on the duration of the conflict. A swift de‑escalation could limit the damage, but for now sentiment remains under pressure.
Business confidence also weakens in the US
In the US, the preliminary PMI shows a similar picture. The index fell from 51.9 to 51.4 in March, the lowest level since April last year. As in the eurozone, the slowdown was driven mainly by the services sector. Manufacturing remains resilient, supported by higher output and new orders, partly due to easing concerns about import tariffs. At the same time, input costs rose sharply, resulting in the strongest increase in selling prices since August 2022. This price pressure is largely linked to higher energy prices. Although the US is a net energy exporter, diesel and petrol prices are set on global markets. US petrol prices have risen by 30% this month — a politically sensitive issue for President Trump ahead of the mid‑term elections in November.
Lower confidence does not automatically mean lower spending
It is important to note that declining confidence among businesses and consumers does not automatically translate into lower spending. Sentiment is currently heavily influenced by the constant stream of negative news. Experience shows that consumers continue to spend as long as they have an income. We therefore need to wait for ‘hard data’ before drawing firm conclusions.
Stay calm and ignore alarming headlines
As long as there is no clarity on a reopening of the Strait of Hormuz and Iran continues to attack neighbouring countries, volatility in financial markets is likely to remain elevated. Markets react to almost every news item, with sharp moves up and down following each other rapidly. For investors, the key is to remain calm and treat alarming headlines as noise. This is not an environment for major investment decisions. History shows that market nervousness following geopolitical escalations usually fades relatively quickly. Investors who exited the market during every episode of geopolitical uncertainty in the past ultimately missed out on attractive returns. As noted, we do not consider this a good moment to adjust our investment strategy. In the meantime, we are closely monitoring risks and patiently waiting for opportunities to emerge.
A neutral equity allocation remains appropriate
The global economy is in relatively good shape despite trade tensions and geopolitical risks, but it has become more vulnerable. Rising energy prices are now both weighing on growth and pushing inflation higher. Against this backdrop, double‑digit earnings growth is still expected globally for 2026 and 2027, while valuations (price‑earnings ratios) have fallen significantly compared with a few months ago. All things considered, we believe it is appropriate to maintain a neutral allocation to equities and bonds. This positioning also provides flexibility to re‑enter markets at more attractive levels should the correction deepen in the coming weeks.
We remain positive on emerging markets
Within equities, we maintain a neutral weighting in US and European equities and an overweight in emerging market equities, while keeping an underweight in Japanese equities. The risk of high energy prices and potential oil shortages in parts of Asia, combined with a stronger dollar, is unfavourable for emerging markets, but Japan is even more vulnerable given its relatively high dependence on energy imports. Emerging markets are still expected to deliver by far the strongest earnings growth of all major equity regions this year, at more than 30%, while valuations remain around long‑term averages.
Underweight energy sector maintained
We also maintain our underweight position in energy stocks. Given their high correlation with oil prices, a neutral allocation would have been more beneficial, but we do not consider it prudent to chase energy stocks at current levels. Markets still assume that higher oil prices will be temporary: futures contracts for delivery at the end of this year are more than USD 30 below current prices. Earnings expectations remain low and are unlikely to rise significantly if oil prices fall back later this year, as expected.
Better opportunities in the energy transition
We prefer to focus on opportunities in the energy transition, energy efficiency and electrification. When energy prices rise sharply, demand typically falls as consumers become more energy‑efficient. An energy crisis also underlines the urgency of moving away from fossil fuels towards renewable energy — not only to reduce CO₂ emissions, but also to reduce dependence on oil and gas imports, often from countries on which reliance is far from ideal. Energy autonomy and price stability are of major strategic importance for governments. We see good opportunities for companies active in areas such as electricity infrastructure and energy efficiency — particularly in sectors such as utilities and industrials, which have already performed well thanks to the rapid growth of AI and data centers — to benefit from this structural growth trend.
Technology stocks remain attractive
We also maintain our overweight position in IT stocks. In the US, the ‘Magnificent Seven’ have outperformed the broader market this month, supported by their strong cash flows and robust balance sheets, which give them a relatively defensive profile. Software stocks, which are under pressure due to fears of AI‑driven disruption, also offer defensive characteristics thanks to their high share of recurring revenues from subscriptions. Earnings growth across the IT sector remains superior, while valuations have fallen to below long‑term averages.
IT earnings expectations have increased, while valuations have declined sharply
Government bonds under pressure; spreads relatively resilient
Upward pressure on long‑term yields in developed markets was already significant due to concerns about public finances and heavy issuance of government bonds. Inflation concerns linked to rising energy prices have now added to this pressure. Short‑term yields have risen sharply as expectations for central bank policy have shifted, flattening the yield curve.
While we believe the recent rise in yields at both the short and long end of the curve has been excessive, we continue to see an underweight position in government bonds as appropriate. In the event of de‑escalation and lower energy prices, we see particular value in short‑dated bonds.
At the same time, we maintain our preference for ‘spread’ products — bonds offering an attractive risk premium — primarily in high‑yield corporate bonds and emerging market debt. An advantage of both categories is their relatively low duration, meaning shorter remaining maturities and lower sensitivity to interest rate movements.
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