The oil crisis reminds us of why and how we invest

Despite fresh worries about the Strait of Hormuz, now in their seventh week of closure, equity markets recently broke new highs, while bond markets have come off from recent levels, with investors, yet again, positioning for rate cuts in the US. 

Market sentiment and economic fears once again clash. While we remain below the 3-months closed bad scenario, the fact is that the world’s arguably most important water gateway has remained closed for an uncomfortably long time. Meanwhile, the threatened seizure of Iran’s shadow fleet, mostly bound for China, risks pulling the world’s second superpower into the fray, significantly complicating the picture. It is, at this point, very hard not to see economic consequences from the Iran war spanning at least until the end of the year, and possibly beyond.  

Both the IMF and the OECD have updated their outlooks and consider slightly worse than originally expected economic outcomes, especially in Europe. The EU last week was considering incentivising remote working to reduce car travel, which, depending on the scale and implementation, could further dampen economic activity. It is not unfathomable that other economies could follow. Meanwhile, British economic growth has recently been marked down by the International Monetary Fund (IMF), to below 1% for 2026, and, while not our base case scenario, there’s a growing probability that we could see a below-zero dip in economic activity in Q2 and Q3. 

Complicating things is the Fed’s cautious stance on interest rates (although many investors believe incoming Fed Chair, Kevin Warsh, will likely cut rates despite increasing inflation pressures). Investment professionals have spent more than a decade crediting the Federal Reserve for all market upside. And to be sure, the Fed’s balance sheet has expanded somewhat over the past few months, despite the rate hawkishness.   

Yet, markets aren’t pricing in economic doomsday scenarios. Why?  

We can always invoke all the usual explanations: “the market is sleepwalking into a global recession” if one wants the bearish argument, or “markets are just concentrated on earnings” if one wants to be more optimistic about things.  

But we don’t think that’s why financial markets, equities especially, are performing well. It is not because they are deluded, or because the Fed has thrown some money into the system, or that investors, who spend every morning looking at the price of oil and gasoline, have suddenly parochially and singularly shifted focus on earnings.  

The explanation might be simpler than this. In the past five years, and after a long time, investors got re-acquainted with inflation. Bank deposits have long underperformed inflation, but when the number was predictably near 1.5% against a deposit of 0.5% to 1%, the impact was small. Now that inflation officially hovers around 2.5% to 3.5% (and more for many consumers) the differential with low deposit rates becomes much more pronounced.  At the same time, online platforms and exchange-traded funds (ETF) proliferated, allowing retail investors much easier and cheaper access to global markets. In the US, there are more ETFs, each an investment strategy, than there are actual traded companies, and we aren’t even counting active funds.  

Additionally, financial and economic deregulation, fiscal stimulus and a general push for higher asset prices by the White House makes the proposition attractive for institutional money as well.  

The combination of inflation, more institutional money, and easier retail market access can be a very powerful investment drive. Even the simplest investor understands that holding cash or relying on their salary at a time of inflation and general economic uncertainty may not be enough to maintain and build the wealth necessary to overcome that uncertainty. Investing in inflation-beating assets over the longer term, coupled with sound personalised financial advice, is a good strategy to weather the present economic uncertainties. This holds true for anyone, from ultra-high net worth individuals, especially if they have low-yielding assets, to every-day investors.  

Now, to be sure, this is not saying that we are in a retail-driven market. If that were the case, then we would have likely seen much wilder gyrations around Iran. But it is a market which exhibits a sanguine understanding that the days of the “Great Moderation”, stable growth and low inflation, are likely behind us and that inflation, an unpredictable economic variable, will continue to play a role in everyday decisions.  

Nor are we talking about runaway inflation either. Globalisation, a key deflationary force, is on the ropes after America’s trade war, but not quite dead. Cheap goods still find their way through the marvel of the modern supply chain. There are two additional powerful deflationary forces at play: Artificial Intelligence, which is set to increase productivity and bring costs down, and an ageing demographic, which naturally slows the rate of growth and demand for credit.  

What it means for businesses 

To be sure, the Iran war is likely to have repercussions on the real economy, in the form of slower growth and higher inflation, as well as product availability. The possible increase of remote working could put additional strain on the economy and disrupt operations. Meanwhile, inflationary pressures could lead to input and final product price fluctuations. But the takeaway is that normal financial market functioning and secular deflationary forces will likely limit economic and inflationary volatility over the longer term.  

What it means for investors 

The return of persistent inflationary pressures fundamentally reshapes the investment paradigm, rendering active capital deployment an essential strategy for wealth preservation rather than a discretionary choice. For retail investors, achieving meaningful, real returns that consistently outpace average inflation is paramount to securing long-term wealth maintenance. Sophisticated investors, including High and Ultra-High Net Worth Individuals, are often well-positioned to leverage diverse cyclical trends, encompassing deregulation, fiscal stimulus, evolving retail participation, transformative technologies like artificial intelligence, and the unique opportunities presented by inflation. Within the investment landscape, inherent uncertainty should be regarded as a complex dynamic, simultaneously representing a notable risk factor and a rich source of potential opportunity, a reality that contemporary global conditions consistently reinforce.  

Market update 

Global equity markets were mixed over the week, with overall world equities slightly down -0.10% as higher energy prices weighed on risk sentiment. Throughout the week, the leading sectors were energy and technology, however, in some areas of the world their positive performance was outweighed by the negative of sectors such as health care and financials. US equities rose +0.60%, showing relative resilience as stronger US retail sales supported confidence in consumer demand. In contrast, UK and European equities recorded sharper declines of -2.60% and -2.30% respectively, as higher inflation concerns, alongside energy-related macro uncertainty affected more cyclically exposed markets. Japanese equities declined -0.70%, while emerging market equities rose +1.20%, benefiting from improved sentiment towards commodity exporting regions following the surge in oil prices. 

In the fixed income space, 10-year yields increased by +15 basis points in the UK and +5 basis points in the US, as markets judged the UK to be more sensitive to the energy price shock, as it is a net energy exporter.   

Oil prices surged +14.80%, off the back of supply and geopolitical concerns. By contrast, gold prices fell -2.50%, as investor focus shifted towards energy driven inflation risks rather than broader financial stress. 

Macro news 

UK labour market: The unemployment rate fell from 5.2% to 4.9% in the first quarter of the year. This decline was driven by a fall in the number of people looking for work. Meanwhile, wages rose by an annual rate of 3.6% between December and February — the weakest rate since late 2020. 

UK CPI: Headline inflation rose to 3.3% year-on-year in March, driven by higher fuel costs due to the impact of the war in Ukraine on global oil prices. Core inflation eased slightly to 3.1%. Inflation is expected to accelerate in the coming months, peaking at around 3.5% to 4% in the summer. 

US economy: retail sales rose by 1.7% m/m, the strongest monthly increase in a year and well above expectations, lifting sales to 4.0% y/y, according to the Census Bureau. The surge was partly driven by a sharp 15.5% jump in gasoline station receipts amid higher fuel prices, but importantly, underlying demand was also firm, with core (“control group”) sales up 0.7% m/m, beating forecasts and pointing to continued strength in consumer spending entering Q2.