SUMMARY
Following the weekend escalation involving US–Israeli strikes on Iran and Iran’s subsequent response, markets have – so far – reacted in a relatively orderly way. The immediate issue is the potential impact on the flow of energy, because the Strait of Hormuz is a critical chokepoint for global oil and gas flows which has almost come to a complete stop. Estimates commonly place Hormuz at roughly ~20% of global oil and gas transit.
At the time of writing, Brent crude has moved up into the low-$80s (after a sharp initial jump), the US dollar has strengthened, and global equities have been somewhat weaker but not disorderly.
We strongly believe that portfolios are behaving as designed: diversification is doing its job. The key question from here is not whether oil can spike intraday, but whether there is a large and sustained disruption that pushes energy prices materially higher for long enough to affect inflation, growth and central bank policy.
PRICE PUMP – HOW HIGHER OIL PRICES PUSH UP INFLATION
Petrol component of US Consumer Price Index (CPI) inflation.
Percentage change from previous year, from 1972 to 2004.
WHAT’S DRIVING MARKETS RIGHT NOW
1) ENERGY SUPPLY RISK: THE STRAIT OF HORMUZ
The market’s primary concern is the potential for disrupted shipping/insurance and reduced tanker traffic through Hormuz, which would tighten crude and LNG availability and push energy prices higher. Recent reporting notes insurers stepping back and ships avoiding the route, which is why ‘closure’ can matter even without a formal blockade.
A number of institutional notes that I have seen converge on a similar framework:
- If disruption is limited/temporary, oil risk premia can fade quickly
- If disruption is prolonged or broadens to infrastructure, oil can move into a ‘macro problem’ zone (often framed as $100+ Brent, sustained)
- Energy consultancies have also warned that prices could exceed $100 if flows are not restored promptly
There has been plenty of analysis in the news media so we have all seen what is happening to prices in the short term both of Oil and LNG which all feeds in to energy / transport / manufacturing, etc.
2) INFLATION, RATES & BONDS
Higher energy prices act like a tax on the global economy: they lift headline inflation and can reduce the pace at which central banks feel able to cut rates. This matters because it can put upward pressure on yields and weigh on rate-sensitive assets if sustained.
In diversified portfolios, inflation-linked bonds (e.g. TIPS) and quality government bonds can provide ballast in a form of ‘risk-off’ exposure – particularly if growth fears rise faster than inflation expectations.
3) EQUITIES: UNEVEN IMPACT BY REGION & SECTOR
Equity markets typically differentiate between energy exporters vs importers. Regions with higher energy dependency can face a tougher terms-of-trade shock, while markets with heavier energy sector weightings can be relatively cushioned.
4) FX: THE DOLLAR AS A RISK-OFF HEDGE
The US dollar often strengthens in periods of geopolitical stress and when energy insecurity disproportionately affects Europe/parts of Asia. Recent market coverage continues to reflect this pattern.
PORTFOLIO POSITIONING: WHY WE ARE NOT MAKING KNEE-JERK CHANGES
This event shows that the key to properly protecting capital for investors is by maintaining our investment process and discipline unless fundamentals change.
The costliest error for long-term investors is often to be reactive and to de-risk the portfolio after markets have already moved – i.e. sell what has already reduced in price in fear that things will and can only get worse.
Within multi-asset portfolios, several building blocks are critical to ensuring some stability in this kind of environment:
- Diversified equity exposure (with sector and regional balance)
- Government bonds / duration exposure as a stabiliser
- Inflation-linked exposure where appropriate
- Alternatives/real assets and, in some mandates, exposure that can benefit from higher commodity/energy pricing
WHAT WE ARE WATCHING FROM HERE (PRACTICAL SIGNPOSTS)
Our investment partners are monitoring a small number of variables that will determine whether this remains a volatility event – or becomes a macro regime shift:
Oil and gas prices: level + persistence
A sustained move above (often framed around $100+ Brent) is what tends to change inflation and policy expectations.
Physical flow indicators
Tanker traffic, insurance availability, shipping diversions, and evidence of constrained exports through Hormuz.
Evidence of widening conflict
Attacks on energy infrastructure, broader regional involvement, or prolonged disruption beyond a ‘weeks not months’ window.
Policy response
Producer response (spare capacity where accessible), and potential use of strategic reserves to smooth near-term dislocations.
Your portfolio is not built for perfect conditions – it was built to withstand uncertainty. At present, portfolios are behaving as expected: diversification is working, and we do not believe short-term geopolitical volatility – by itself – is a reason to abandon a well-constructed long-term strategy.
N.B.
That said, we are not complacent. If disruption becomes prolonged, energy prices rise sharply and stay elevated, or the situation broadens in a way that meaningfully alters inflation, growth, or central bank trajectories, we retain the flexibility to adjust positioning.
Important: This note is for information only and does not constitute a personal recommendation. If you would like to discuss your portfolio in the context of your objectives and time horizon, please contact us.
Please contact NBL if you need to speak to us.
