Increasing quality to hedge geopolitics – Counterpoint April 2026

March 31, 2026 by Daniele Antonucci, Co-Head of Investment & Chief Investment Officer

6 mins to read this article

What you need to know

Geopolitics continues to dominate the headlines and has triggered bouts of market volatility over the past month or so. But there’s a wide range of possible outcomes. A de-escalation of the Iran conflict could support a quick recovery. A prolonged disruption, conversely, could weigh more heavily on the economy, raise inflation and lower asset prices.

We’re increasing the quality of our fixed income assets by buying European government bonds and US Treasuries. These ‘safer’ bonds have already priced in interest rate hikes in reaction to growing inflationary pressures. We’re funding these purchases by selling riskier corporate bonds. Within emerging markets, we buy higher-rated local currency bonds and sell lower-rated hard currency bonds.

We’re also increasing the quality of our active equity positioning. Relative to our long-term asset allocation, we have now moved to neutral US equities from previously underweight, and neutral European equities from a small overweight. History suggests that the US is a more resilient market in periods of stress. The US is also less exposed to the Iran conflict, as it doesn’t rely on oil transiting through the Strait of Hormuz.

Note: Any reference to portfolio positioning relates to our flagship core discretionary portfolios. Clients invested in other strategies, or in bespoke and advisory portfolios, should consult their Client Advisor.

Understanding oil disruptions and their market impact

The past few weeks have brought sharp swings in markets, with brief rallies giving way to sell-offs. The main catalyst has been the Iran conflict, which has put pressure on both equities and bonds, reversing earlier gains. The immediate economic impact is clear: higher oil prices are pushing inflation higher and driving bond yields up. As a result, markets have shifted their expectations, moving away from the idea of rate cuts and towards the possibility of rate increases.

We’ve revised our base case, too. We now expect slower economic growth, higher inflation and a different interest rate path. For the Eurozone and the UK, we expect rate hikes, while we still think that the US Federal Reserve (Fed) may be able to make a rate cut later in the year, though no more than one rather than two as we assumed previously. Events remain very fluid, with markets shifting between fears of escalation and signs of potential easing. The key question is how long the conflict will last and how it will affect oil flows and, ultimately, prices.

The chokepoint is the Strait of Hormuz, through which roughly 20% of global oil flows. That’s a significant amount but most of that oil goes to Asia, not Europe or the US. China takes about half of it, but its energy sources are well diversified, so oil only accounts for about a fifth of its energy consumption. China also holds sizeable strategic reserves. So, while a supply disruption would matter for global importers, its impact may not be as large as that headline 20% figure suggests.

Politics and funding limit US military involvement

Geopolitical events rarely produce straight market moves. Prices shift as probabilities change, sometimes sharply. When the likelihood of extreme downside scenarios begins to fall, markets often steady even without a full resolution of the underlying conflict.

A drawn-out conflict poses a risk for investors, but a shorter-than-expected conflict could also trigger a market rally. One possible catalyst could come from US politics. Congress still needs to approve additional funding to prolong US military operations in Iran, at a time when bond yields are rising and concerns about inflation and fiscal spending are growing.

That approval is far from guaranteed. The US appears to have spent an estimated $20-30 billion so far, with analysts pointing to a cost of at least half a billion dollars per day. Any additional funding for the Iran war will require 60 votes in the Senate, not just 50. This means the White House will need at least eight Democrats, assuming Republicans are all united in favour, which we don’t think they are.

The midterm elections add another constraint as there is a real possibility that Democrats gain a majority in Congress. That reduces the political incentive to sustain a prolonged conflict, especially as Trump’s approval ratings are falling as voters grow more concerned about fuel and food prices. Therefore, a drawn-out conflict could carry greater political risk at home than abroad, which may discourage the current Administration from prolonged military action.

The scar from the 2022 inflation spike and what’s different today

When Russia invaded Ukraine in 2022, inflation was already high and consumer demand was strong after the post-pandemic reopening. At the same time, supply chains were under strain and labour shortages were very widespread, adding further pressure to prices.

Part of that pressure also came from Europe’s reliance on Russian gas. When those supplies were disrupted, consumer prices rose sharply and inflation expectations increased. Central banks reacted with aggressive rate increases that began from negative levels in the Eurozone and near‑zero levels in the US and UK. Those moves fed through into markets and led to a broad repricing across asset classes.

Today, the backdrop is less fragile. Europe’s energy mix has changed substantially, with Russian gas now only a small share of total imports. Natural gas from the US, Norway and other producers, together with renewable sources, has closed much of that gap. Because of that, the effect of the recent oil price increase on broader inflation appears more contained. Policy rates are also higher than in 2022, and consumer and labour markets, as well as supply chains, are no longer under the same pressure.

All of this means we’re at a different starting point than we were in 2022. Yet, after underestimating inflation back then, investors and policymakers now seem more sensitive to the risk of rising inflation.

Our strategy as the conflict in the Middle East unfolds

Geopolitics dominates the headlines, but the reality is that there’s a wide range of possible outcomes. A sudden de-escalation could support a relatively quick recovery, boosting consumer, business and investor confidence. A prolonged conflict could stunt economic growth, push inflation and interest rates higher, and asset prices lower.

Over the long term, equity markets tend to be shaped more by fundamentals and earnings than by geopolitical events. Our priority is to stay invested and allow returns to compound, remain diversified so that weakness in one area can be offset elsewhere, and adjust positioning gradually rather than react to short-term noise. This is the approach we use to build strategies that can cope with different scenarios.

We continue to own gold, broad commodities and inflation-linked bonds as this hedges against inflation and geopolitical risk. Importantly, while we expect the US dollar to weaken over the long term as emerging market investors diversify their reserves, it has once again shown its strength in periods of stress. So, tactically, we have increased our dollar exposure back to neutral, reducing the risk of being caught on the wrong side of a typical safe-haven move.

Also, with the recent bout of volatility our ‘insurance’ warrant has risen in value, recouping its initial cost (we use this instrument where client knowledge and experience, and regulations and investment guidelines, permit). We locked in that gain and kept the rest in place until June to mitigate downside risks should volatility persist.

Rebalancing to strengthen portfolio resilience

In fixed income, safer government bonds now offer better value relative to riskier bonds. Their higher yields and lower prices already factor in a significant number of rate hikes, more than we believe central banks intend to deliver. By contrast, the extra compensation offered by riskier bonds is small and, in our view, doesn’t justify the additional risk. We are therefore buying European government bonds hedged into sterling to strip out currency effects and US Treasuries too – while keeping our exposure below our long-term asset allocation benchmark – and selling riskier European investment grade, global high yield and emerging market hard currency bonds. We remain somewhat cautious on UK gilts: yields are more attractive, but volatile domestic political and economic news could still be negative for this asset class.

The recent sell-off has lowered the value of equities most exposed to the conflict. They now represent a lower share of the portfolio. This provides us with an opportunity to rebalance towards the initial levels, but with regional nuances. Applying the same discipline we used during the ‘liberation day’ tariff announcements, rather than reinstating the European equity overweight we held before, we’re just moving back to neutral while maintaining a smaller emerging market overweight. This adjustment also increases the tactical weight of US equities, a market that has often shown greater resilience, is more insulated from the conflict and tends to be less sensitive to oil prices. As a result, we believe the overall quality of our equity holdings improves. We also remain overweight UK equities, as we think it’s a market that tends to behave defensively in periods of stress.

We are also adding slightly to emerging market bonds in local currency, though it remains a small share of the overall portfolio. We continue to believe that this asset class offers compelling yields, adds diversification and provides exposure to oil exporters outside the Middle East. It could also benefit if the Iran conflict ends and the US dollar resumes its long-term weakening trend.

Geopolitical events can feel unsettling, and it’s natural to have questions on what’s going to happen and what it means for the economy and markets. As the situation evolves, we’ll keep looking out for the signals that matter for investors and make adjustments to our strategy and positioning with a focus on portfolio diversification and resilience over time.

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Information correct as of 31 March 2026.

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