Oil matters – Counterpoint May 2026

Markets are reacting to higher oil prices linked to the Iran conflict. The path from here depends on how long the disruption lasts and how far it spreads. While Europe and some emerging markets are more vulnerable, the US is relatively insulated geographically and doesn’t rely on oil passing through the Strait of Hormuz. 

The strong equity market rebound since the end of March has led to an increased share of equities within our portfolios. We have adjusted our equity positioning back to the initial asset allocation weights to be moderately rather than aggressively risk-on, taking profits in equities to lock in gains and buying back some bonds at cheaper prices. However, we do so selectively rather than mechanically, through two trades.  

The first is within equities. Higher oil prices can hurt smaller firms more than larger ones. We are closing our global small-cap equity position and reallocating to broad US equities, which are typically higher-quality companies with stronger balance sheets. Given the strong rally in US equities, rebalancing portfolios does mean selling some US equities to get back to target weights. But, because we sell small-caps at the same time, the importance of US equities in our tactical asset allocation increases.  

The second is in fixed income. We are using some cash we had set aside to add to emerging market bonds in local currency, though this position remains a small part of the portfolio. We see value in the yields on offer and the diversification this asset class can bring. It also gives exposure to oil exporters outside the Middle East and, within broad emerging market debt, it’s a higher-quality market. 

We believe these two trades complement the changes we made to portfolios last month, which focused on diversification and improving the overall quality of the portfolio. As a quick recap, we reduced our European equity exposure back to neutral, increasing the weight of US equities in our tactical asset allocation, and bought high-quality European government bonds and US Treasuries, reducing riskier European investment grade, global high yield and emerging market hard currency bonds.  

As hedges against inflation and geopolitical risk, we continue to own gold, broad commodities and inflation-linked bonds and an ‘insurance’ warrant that appreciates when equities fall (we use this instrument where client knowledge and experience, and regulations and investment guidelines, permit). 

Higher oil prices add headwinds, but at this stage, the broader growth trajectory hasn’t changed too much. While there are regional differences, global growth has moderated, not collapsed outright. 

In the US, consumer resilience, a still relatively healthy labour market and AI-related investment continue to support activity. Domestic demand is still growing, and that remains a key anchor. 

In the Eurozone and the UK, growth is likely to stay below trend. Elevated savings and still-low unemployment should help cushion the slowdown, but reliance on oil from the Middle East adds to the drag. 

China has also shown firmer momentum than feared, supported by exports, policy flexibility and domestic stabilisation efforts. While oil is an issue in this case too, by and large we think the Chinese economy has the means to cushion a more protracted increase in energy prices. 

Overall, we see a softer but still resilient global backdrop, rather than the start of a synchronised downturn. And, with political pressure to disengage from the Iran conflict mounting ahead of the midterms, and costs to finance military action adding to an already elevated debt burden, we think the US has an incentive to de-escalate. 

However, should de-escalation not happen within a reasonable timeframe and, therefore, the surge in oil prices lasts more than two quarters and extends beyond the summer, we’d expect a more significant deceleration in growth.