Economic outlook
If the singular item on any current investment agenda is the war in the Middle East, then the keenest and most direct economic measure of the war’s impact is the price of oil. About 20 per cent of global oil supply comes through the Strait of Hormuz, and disrupting the supply of even one fifth of any vital commodity will send prices soaring. This has had a marked impact already, with the price of Brent crude rising by as much as 50 per cent year to date, climbing to over US $100 a barrel.
Demand for oil is notoriously ‘inelastic’ in the short run, given the lack of suitable substitutes. J P Morgan’s oil analysts estimate this elasticity at -0.024, meaning that the oil price must increase by an astonishing 40 per cent to drive a one per cent fall in demand. Most of the oil passing through the Strait is destined for Asia, which is feeling the tightened supply crunch first. The Financial Times reports that officials in Thailand and Vietnam have been urged to use stairs, work from home and limit travel, while Pakistan closed schools and moved universities online. What Asia is feeling now may well spread elsewhere if the war continues.
While the US is a net exporter of oil, the way it’s processed means that the US can’t easily restrict exports and rely wholly on its own domestic production. US oil production is weighted towards light crude (used in petrol and jet fuel), but its imports and refineries focus on heavy crude (used for diesel, marine and industrial fuel). That said, the US does have a degree of energy independence which makes it somewhat less susceptible to the effects of soaring prices than Europe.
The likely effect then from restriction in oil supply and higher prices is to drive inflation higher. Fed chair Jay Powell recently noted that higher energy prices would push up inflation, and the Bank of England has stated it stands ‘ready to act’ on inflation. In turn this is likely to drive interest rates and bond yields higher, and constrain global markets.
Even more damaging perhaps is the air of uncertainty weighing on the economic outlook. As of now, President Donald Trump has stated that the timing of any end to the conflict will depend on US decisions. What is clear is that this war is no longer shaping up as a quick and easy win for the US and Israel.
Equities
Equity performance over the past year
27/03/2025 – 27/03/2026, local pricing
Equity market performance has reflected differing exposure to energy supply risk. At the time of writing, the US market is down about four per cent (year to date), while European stock prices are down about double that. Given the uncertainty of the geopolitical outlook, it would be unwise to try and predict where markets might go in the near future.
It is also worth remembering that, independently of the present conflict, there are significant themes in equity markets driven by huge investments into AI-related technology. We have been stressing the need to give thought to both the pace of change driven by AI and the real beneficiaries. The area is developing so rapidly that today’s winners can be tomorrow’s losers. The experience of revolutionary change, such as AI, is likely to present early hiccups and disappointments, but major long-term gains. Stock markets have been allocating most AI gains to the ‘manufacturers’ like Nvidia and Microsoft. But there is increasing recognition that the real winners in a competitive market may be some users – or developers whom we are yet to hear of. The sheer size and scope of companies like Alphabet and Amazon may protect them against significant crashes, but they are certainly at risk of being overvalued.
Fixed income
Bond performance over past year
All bonds 1-10 years, 27/03/2025 – 27/03/2026, local pricing
As we’ve noted before, while we expect equities to remain the largest holding in most portfolios, there is now a strong case for having a reasonably substantial bond holding – the argument being that bonds look reasonable value, while equities look expensive.
Still, the impact of rising oil prices might eventually feed through to higher inflation, which could hold interest rates at current levels or even drive them higher, depressing bond values. This is already being priced in, almost all government bond yields have risen over the past weeks, with the US 10-year Treasury yield climbing from below 4 to nearly 4.3 per cent since the start of the war. German 10-year bond yields have risen by a similar amount, while the UK bond market has been struck even harder.
Euro cash
The ECB has paused rate reductions at 2 per cent, but has signalled that they will act in order to maintain inflation at target levels.
Irish commercial property
The Irish commercial property market is expected to slowly transition into a recovery phase in the coming years, supported by improved credit conditions. Demand is likely to be focused on properties with strong environmental qualities.
It remains a difficult asset class due to liquidity concerns and the structural challenge that many properties may require retrofitting to remain competitive.
Commodities
Commodity performance over past year against equities
27/03/2025 – 27/03/2026, US dollars
Commodities have been one of the few winners in the current environment, with the Bloomberg Commodity Index up over 20 per cent year to date.
Hedge funds
Hedge fund performance over past year against equities
28/02/2025 – 28/02/2026, US dollars, hedge funds priced monthly
Hedge funds remain an appropriate investment because of their defensive qualities and they can be structured to have a low correlation to equities.
Multi-asset funds
Because of the very wide range of investments they hold, they provide useful diversification, and the ability to dynamically shift asset allocation can provide some protection in times of equity market corrections.
Senior loans
These floating-rate sub-investment grade securities offer a premium over cash and are useful for diversifying a portfolio.
In summary, all markets remain on alert for news in the Middle East. For investors, the key is not to be swayed by exuberance or short-term sentiment, but to remain disciplined, diversified and focused on long-term objectives. At Acuvest, our role is to navigate these uncertainties on your behalf, balancing opportunity with caution to help safeguard and grow your wealth in a sustainable way.
