In Dire Straits: Discipline in Volatile Markets

Interest rates and inflation expectations

Government bond markets have been particularly volatile, as investors reassess the outlook for inflation and interest rates.

Rising energy prices have led markets to quickly change their outlook on what they expect central banks like the US Federal Reserve and the Bank of England to do this year. Markets had expected a series of short-term interest rate cuts back in February, but quickly reversed course as the war kicked off, removing these expectations, or even reversing them.

These shifts reflect concerns that a prolonged energy shock could push inflation higher and force central banks to respond more aggressively, particularly in regions that are more energy‑dependent.

The results of this change in outlook on bond markets was swift. Government bond prices fell and bond yields (which move inversely to prices) across major developed markets rose sharply on expectations of higher central bank policy rates. In the UK, yields have risen more sharply, with market moves appearing especially pronounced, relative to underlying economic fundamentals, in our view.




Thinking in scenarios

In periods of high uncertainty, scenario analysis is a useful way to think about possible outcomes. For the current Middle East conflict, we consider three broad scenarios, ranging from a short‑lived disruption to a more severe escalation.

Our central expectation remains that disruption to energy supplies is relatively temporary, allowing markets and economies to stabilise later in the year and over 2027. Policymakers are actively working to limit the impact of the energy supply disruption by releasing strategic reserves, temporarily easing sanctions or embargoes, and encouraging energy conservation. If the conflict does indeed come to an end in the weeks to come (as President Trump has recently indicated) and shipping in the Strait begins to normalise, this outcome would be likely.

A more adverse outcome would likely require a major escalation of the conflict, such as further direct attacks on regional energy infrastructure or the involvement of additional global powers, the economic impact of which would vary by region. We think this scenario is less likely that the one outlined above – but cannot be ruled out.

In that environment, the ultimate market outcomes would heavily depend on the countries’ starting economic positions, their ability to absorb shocks, and how exposed they are to Middle Eastern energy supply. For example, even in a more disruptive scenario, the US economy would likely remain relatively resilient, supported by strong underlying growth drivers such as investment in AI, fiscal support and healthy household and corporate balance sheets. Parts of Europe, Asia and select Emerging Market economies would all be more vulnerable to a prolonged energy shock, likely impacting stock and bond markets significantly.




What this means for long‑term investors

History suggests that geopolitical market shocks which remain geographically contained often lead to short‑term volatility but have limited lasting impact on long‑term investment returns. More persistent damage to investor portfolios has typically occurred only when conflicts result in prolonged energy supply shortages that materially weaken economic growth.

The 1973 Arab oil embargo is one such example, where oil prices quadrupled and sustained shortages fed into persistent inflation, slower growth and policy tightening across advanced economies, prompting a structural reassessment of energy security and dependence on Middle Eastern supply.

In contrast, short term oil prices rose roughly 50% to 60%* over the past month, but with future price expectations showing far more modest increase, around 15% to 20%.

While certainly material, these increases are coming from a low base, and the economy is now far less sensitive to fossil fuel prices than it was in the 1970s. At this stage, recent developments do not materially alter our medium‑term investment outlook into late 2026 and 2027.

*Oil and energy prices vary by location and time, with Brent and WTI being the most commonly used benchmarks. Here we reference changes to shortdated Brent pricing as well as Brent oil futures

Staying disciplined

Periods of heightened uncertainty can be unsettling, but they also reinforce the importance of sticking to well‑established investment principles. 

Rather than reacting to the changing news flow and the challenge of short-term market timing, which risks crystalising unnecessary losses, we believe portfolio decisions should remain guided by long‑term objectives and a clear framework for assessing how events may, or may not, change the underlying economic and market outlook. 

Although we can speculate, nobody can be certain about what the next headline will bring, what the US administration or the Iranian regime will do or say. And every crisis has its own dynamics and risks. Further challenges to the global economy resulting from higher energy prices for longer than expected cannot, of course, be ruled out.

However, we can take some comfort in history suggesting that most geopolitical crises have short-term negative impacts on markets and stock prices, which set the stage for more positive returns over the following six to twelve months.

Our investment philosophy emphasises portfolio diversification as the cornerstone of a disciplined approach and staying the course to build wealth through investment over the long term. We believe maintaining a diversified, long‑term approach to investing remains the most effective way to navigate periods of geopolitical uncertainty.