Inflation is the mind-killer

The war in Iran has lasted way more than originally expected. And while this can possibly be said for the overwhelming majority of conflicts in human history, it comes as somewhat of a surprise to markets that Iran was allowed to freely play its one and only card, closing the Strait of Hormuz and effectively controlling all traffic for 20% of global oil production for a fifth week. A stark reminder that, for all our technology, we remain prisoners of geography.  

The question for businesses and investors is this: are markets currently accurately forecasting high inflation, and potentially interest rate hikes in 2026? Are they even underplaying the risks? Or are they overplaying them, suffering from the collective trauma of 2022, when traders and central banks who hadn’t seen inflation for over 20 years, once again became acquainted with it, as the Fed forced sudden rate hikes giving bond investors their worst year ever? 

Oil prices are now over $110, a little less than double their pre-war average of $60.  

Equities, which haven’t experienced a meaningful pullback, remain calm, although we have seen a rotation of capital from Emerging Markets and Europe back towards Dollar assets (EU -8% from highs, UK -4%, US 5%, EM -10.5%).  

Unlike equities, bonds tend to be a lot more sensitive to inflation scares. And while, up to this point, markets anticipate a swift return to normal in terms of oil trade, we have to look at our assumptions and evaluate them.  

It is tempting to prove that 2026 is not 2022. A few years ago, inflation was considered rare, if not extinct, markets ignored geopolitics and bonds were yielding 1%. None of these apply today. But proving that 2026 is not 2022 (what is known as a “straw man argument” doesn’t mean that 2026 can’t produce similar results).  

So let’s take it from the top 

As we are dealing with an exogenous event and a very complex military operation in one of the world’s most dangerous territories, it would be unwise for us as investors to make assumptions about the fate of the Straits.  

The scenarios from here are many. For the economy of the discussion, we will boil them down to three: Our base case scenario, our pessimistic scenario and our optimistic scenario.  

How should investors deal with the uncertainty? 

The best way to look at these scenarios, is to remember that all, by and large, depend on one variable: how long will the Straits of Hormuz remain closed for? With every week passing, we move away from the positive scenario and edge towards the negative scenario.  

From an investment perspective it should be good to remember that we are in an inherently more volatile and inflationary world, the consequence of the US trade war. This, historically, can be more negative for fixed income, for which inflation is the primary adversary. Having said that, we don’t see a world where runaway inflation and sharp rate hikes would not affect equities equally or more, but they would also likely see a faster rebound.  

How should businesses best prepare? 

In terms of companies, we would bring the discussion back to our 3D scenarios (Debt, Disruption, Deregulation). Companies should already be preparing for a strategically more disrupted world, and adding energy to the list of inputs for which diverse supply chains may be required. The Straits of Hormuz shock could be another (if not necessarily the final) nail in the coffin of a world where smaller manufacturers took advantage of technology to disrupt and challenge their big rivals. Size will matter more and more, as will breadth, and both increase with synergies. For larger and smaller corporations, we would expect to see more team-ups (in form of acquisitions, joint ventures, outsourcing etc) to deal with increasing complexities. Urgency and uncertainty would mean that M&A might not happen at previously very high valuations. 

Market update 

Global equities advanced over the week, led by a strong rebound in US equities, which gained +4.5% following hopes of deescalation in Middle East tensions. European equities rose +1.9%, supported by cyclical sectors, with investors taking comfort from signs of potentially stabilising growth. UK equities lagged with a more modest +0.7% gain, reflecting their heavier exposure to energy stocks and defensive sectors. Emerging market equities increased +3.0%, supported by an improved global risk backdrop and firmer commodity linked sentiment, while Japanese equities rose +0.9%, as gains remained more contained due to a mixed domestic outlook and a stronger yen weighing on exporters. 

Fixed income delivered positive returns over the week as government bond yields declined and corporate spreads tightened. UK and US 10-year yields fell by -7 basis points each as the pullback in energy prices eased concerns over persistent inflation. 

Oil prices fell sharply by -12.7% over the week, as Iran briefly signalled the Strait of Hormuz would reopen, easing near‑term supply disruption fears. Gold rose +1.7%, in spite of the broader sell-off in defensive assets as markets priced in lower real yields due to the pullback in oil prices.

Macro news 

IMF Economic Outlook: The IMF cut 2026 global growth to 3.1% (from 3.3%) on Middle East-driven energy shocks, with US growth at 2.1%, euro area 1.4%, and the UK sharply downgraded to 0.8% (from 1.3%); at the same time, inflation risks have risen, with headline inflation revised up to 4.4% globally, remaining stickier in the UK (3-4% in 2026) due to energy dependence, while US and euro‑area inflation ease more gradually, keeping central banks cautious about rate cuts. 

UK GDP expanded by a stronger‑than‑expected 0.5%, signalling that the economy was gaining momentum ahead of the Middle East conflict, with broad‑based services growth leading the acceleration - driven in particular by wholesaling, market research, hospitality, and publishing.