Key takeaways
- For oil, the base case is an elevated geopolitical premium with Brent trading US$80 to US$95 and WTI relatively capped given US export status and domestic supply flexibility. Escalation case pushes Brent past US$100 with widening Brent-WTI spreads.
- For equities, while markets are likely to respond with higher volatility and a near-term repricing of risk assets, our base case remains constructive on global equities, unless energy supply disruption becomes sustained and structural.
- For fixed income, a typical flight to quality reaction may still support AAA-rated sovereigns. High-quality Asian currencies may also stabilise and recover after the initial market shock. Wider spreads should create selective buying opportunities, particularly in high-quality credit.
Macro
Salman Ahmed, Global Head of Macro and Strategic Asset Allocation
Despite the death of Supreme Leader Ali Khamenei, the events unfolding in Iran today is not a regime shift like Venezuela, or even a broader dismantling of the country’s command structure, given that governance in Iran is institutionalised. The key question is, who will emerge as the next Supreme Leader?
The appointment of another hardliner would increase the likelihood of worst-case outcomes, potentially prolonging the conflict and allowing it to morph into sustained guerrilla warfare engulfing the region in a combustible steady state. We continue to assign a low probability to this outcome, given that all major actors, including China, have a strong interest in ensuring the Strait of Hormuz is not disrupted for an extended period, alongside Iran’s own regime survival priorities.
The sustained ability to wage a pro-longed retaliation by Iran remains a very important variable here. As of this writing, the Iranian Navy has not been used yet – Iran has more than 30 warships and the ability to blockade or mine the Strait of Hormuz.
Oil prices will indicate how markets are assessing the situation (expect a spike and volatility). We are currently operating somewhere between Scenario 1 and Scenario 2 below with rising probability of the latter. History suggests that Middle East events tend to be episodic, and there are potential circuit breakers, particularly given that US boots on the ground are not an option. The Trump administration is operating under time constraints, and the killing of Khamenei provides a tangible win point. The historical tendency of Iran is to look to off-ramp at the earliest available opportunity.
Scenario 1: Controlled tit for tat, most likely near term (50 per cent)
Without full-fledge removal of senior Iranian leadership, this becomes a sustained but bounded exchange.
Characteristics include continued Iranian missile and drone strikes on US regional bases and Israel, followed by US and Israeli precision strikes on the Islamic Revolutionary Guard Corps assets and launch infrastructure. Proxy groups remain active but calibrated. The Strait of Hormuz remains unblocked and unmined and Gulf energy infrastructure is largely spared.
Implications include persistent regional instability and gradual depletion of missile defence interceptors. Oil carries a geopolitical risk premium, but physical flows remain intact.
In this scenario, Brent likely trades in the US$80 to US$95 range. Importantly, this would predominantly be a Brent shock rather than a WTI shock. The US is now a net exporter of crude and refined products and retains the ability to cap domestic price spikes through strategic reserve management, export policy tools, or logistical reallocation.
The transmission mechanism into US inflation would, therefore, be more muted relative to past Gulf conflicts. The price shock would be more acute for Europe and Asia given their exposure to seaborne Middle Eastern crude. This scenario reflects controlled escalation (significantly more intense than last year) rather than systemic energy disruption.
Scenario 2: Escalatory spiral without regime collapse (25 per cent)
A higher casualty event, a successful Iranian strike on critical infrastructure, or Israeli targeting of senior Iranian leadership could widen the conflict.
This would involve larger Iranian missile salvos against Al Udeid in Qatar, the Fifth Fleet in Bahrain, and UAE infrastructure. Hizbollah could escalate along Israel’s northern front. Iraqi militias could intensify attacks on US assets. Select Gulf energy facilities or tankers could be targeted.
Oil in this scenario likely moves into the US$90 to US$110 range, driven primarily by Brent. Insurance costs for Gulf shipping would surge and risk premia would widen across commodities and regional assets. Even here, the US domestic oil market would likely remain relatively better anchored compared with international benchmarks, reinforcing the divergence between Brent and WTI.
Scenario 3: Strait of Hormuz disruption, tail risk (25 per cent)
This requires a regime survival trigger such as an attempt to dismantle the country’s command structure or sustained infrastructure destruction.
Iran could mine the Strait, seize tankers, or launch missile and drone attacks against transiting vessels. Even partial disruption would materially affect roughly 30 per cent of global seaborne oil flows.
Oil could spike above US$120 in the immediate aftermath. Strategic reserves would likely be deployed by major consuming nations. China would become an active diplomatic actor given its dependence on Gulf supply. US naval response would be rapid and forceful.
This remains the ultimate escalation lever and is highly damaging to Iran’s own economic and regime survival interests, which is why it has historically threatened but not executed full closure.
Oil and wider market implications
The base case is an elevated geopolitical premium with Brent trading US$80 to US $95 and WTI relatively capped given US export status and domestic supply flexibility. Escalation case pushes Brent past US$100 with widening Brent-WTI spreads.
A Hormuz disruption creates a severe Brent-led spike with global inflationary consequences and forced policy responses. The critical distinction is that this is structurally more a seaborne crude shock than a US domestic supply shock.
This will be negative for equity, adding to current worries around AI, and bond risk, especially oil consumers or those who are cost exposed (remains to be seen how much of an ‘episode’ this is for now), positive for gold and precious space – the only true safe haven in a supply shock world.
Historically, the US dollar has done well in these kinds of situations, but this is not a given anymore. Diversification remains key even if this turns out to be an elongated episodic issue.
Bottom line
In the absence of widespread leadership decapitation leading to regime collapse risks, this is most likely to become an ongoing, calibrated exchange rather than an immediate high intensity regional war.
Iran has already demonstrated willingness to strike US bases across the Gulf. The Strait of Hormuz has not yet been targeted with mines or actively blocked, although traffic has come to a near standstill, suggesting Tehran is deliberately retaining its highest impact lever.
The key swing factors are sustained leadership targeting, US and Israel casualty thresholds, and whether shipping or energy and broader infrastructure is directly hit.
For now, markets should price sustained geopolitical premium rather than systemic supply collapse, with Brent bearing the brunt of the risk and WTI comparatively insulated and the shock transmitting through both oil and confidence channels.
Equities
Niamh Brodie-Machura, Chief Investment Officer, Equities
The recent significant escalation between the US, Israel and Iran marks a clear rise in geopolitical risk. Markets are likely to respond with higher volatility and a near-term repricing of risk assets. Our base case, however, remains constructive on global equities unless energy supply disruption becomes sustained and structural.
Global equities entered this episode from a position of reasonable momentum. The MSCI World Index trades at roughly 23x delivered 2025 earnings, elevated relative to history. Investors have been willing to pay this premium due to expectations of solid earnings growth and easing concerns around tariffs and trade. Importantly, market leadership had already broadened in early 2026, with greater dispersion across sectors and regions. That dispersion is likely to increase further in the current environment.
What matters now?
Three risks merit close monitoring:
- Energy supply disruption. A sustained impairment of oil flows through the Strait of Hormuz would materially affect global energy and freight prices. A temporary spike is manageable; prolonged disruption would pressure margins and real incomes.
- Inflation and monetary policy. An energy-driven inflation pulse could constrain central banks’ ability to ease policy if growth slows. Markets currently assume flexibility from policymakers; that assumption may be tested.
- Confidence effects. Elevated geopolitical uncertainty can weigh on corporate investment and consumer spending, even absent physical supply shocks.
If these channels remain contained, earnings growth — not geopolitics — will likely reassert itself as the primary driver of equity returns.
Positioning in periods of stress
Geopolitical shocks tend to increase volatility and dispersion more than they permanently impair equity markets. Staying invested remains critical to achieving long-term objectives. At the same time, portfolio resilience matters.
We continue to favour diversified allocations across regions and sectors. In periods of uncertainty, diversification across economic exposures, rather than concentration in a single theme, geography or policy regime, becomes particularly valuable. We remain vigilant. A sustained disruption to energy supply or a policy-induced growth shock would warrant reassessment. For now, however, volatility appears more probable than structural impairment.
Fixed Income
Marion Le Morhedec, Chief Investment Officer, Fixed Income
Markets are likely to experience short-term volatility due to heightened geopolitical tensions and a disrupted outlook for oil prices and inflation. A typical flight to quality reaction may still support AAA-rated sovereigns — such as US Treasuries, Bunds, and highly rated issuers — although recent geopolitical realignments mean global investors have been gradually reducing their reliance on US Treasuries as the dominant safe haven asset. This evolving pattern reflects both geopolitical diversification and an increased willingness to rotate into high-quality sovereigns outside the US. Inflation breakevens could be repricing higher inflation expectations across geographies if the conflict were expected to last significantly.
Asia is increasingly perceived as a relative safe haven, with Hong Kong and Singapore positioned to benefit from a potential relocation of capital and talent from the Middle East. High-quality Asian currencies may also stabilise and recover after the initial market shock. Wider spreads should create selective buying opportunities, particularly in high-quality credit.
The primary regional risk is a sharp rise in oil prices, especially if disruptions occur in the Strait of Hormuz. Major Asian economies — India, China, Japan, and South Korea — are highly dependent on oil from the Middle East and may need to draw down strategic reserves. A prolonged disruption would significantly raise inflation and cost pressures. Such inflationary effects could negatively impact inflation-linked bonds, broader rates markets, and credit segments sensitive to macro conditions.
Historically, geopolitical risk premia in Gulf Cooperation Council (GCC) markets tend to reemerge during periods of tension, affecting oil sensitive credits. However, GCC national champion banks and Israeli banks generally remain fundamentally strong; valuations will depend on how markets price macro risk.
Israeli banks are experiencing a more contained situation compared with the 2023 Gaza conflict. They have demonstrated resilience, returning to markets earlier this year with improved asset quality and strong capitalisation. Their credit cycles and cost of risk trends remain consistent with Bank of Israel stress tests. Rating downgrade risks have eased, though Israel’s sovereign rating retains a negative outlook from Fitch.
Middle Eastern banks in the UAE, Qatar, Saudi Arabia, and Kuwait face risks through weaker business sentiment, trade disruptions, and hydrocarbon export challenges. Higher oil prices support sovereign finances, but a blockage of the Strait of Hormuz could sharply reduce exports for Kuwait and Qatar, while the UAE and Saudi Arabia can reroute most flows through alternative pipelines. Nonetheless, strong sovereign wealth buffers, improved underwriting, diversified loan books, and a robust history of state support should help banks absorb shocks.
Multi Asset
Matthew Quaife, Global Head of Multi Asset Investment Management
While geopolitical developments remain difficult to forecast with precision, portfolios should be positioned to withstand a range of potential outcomes. Alongside the conflict, several macro fault lines remain in play. The path of US fiscal policy is critical given debt and issuance dynamics, while the US Federal Reserve’s reaction function is facing greater political scrutiny. The durability of AI-led investment is another key swing factor — both in sustaining US nominal growth and in determining how far productivity gains and disruption extend beyond the technology sector.
At a broader level, growth across major regions remains intact, with particularly strong nominal momentum in the US supported by fiscal expansion and AI-driven capital expenditure. The global cycle is still in expansion, but dispersion is increasing as geopolitical fragmentation and strategic trade tensions reshape trade and capital flows. We remain constructive on equities over the medium term, supported by resilient earnings and policy backing, while recognising that near-term volatility may rise. Gold remains a valuable portfolio diversifier in a world of rising geopolitical fragmentation, ongoing fiscal expansion and more fragile bond–equity correlations, with its role as a structural hedge against policy and confidence shocks firmly preserved. Consistent with our approach, periods of dislocation would be viewed as opportunities to add risk selectively rather than a signal to structurally retrench.
