Jeffrey Palma

Volatile energy prices create uncertainty, but real assets should be resilient.

What happened?
Intensifying conflict involving Iran has disrupted regional energy production and global supply chains. Attacks on energy infrastructure and rising security threats have constrained tanker traffic through the Strait of Hormuz, a critical artery for global oil, liquefied natural gas and petrochemical flows.

Major producers implemented precautionary production cuts as storage constraints and logistical bottlenecks emerged. The situation remains fluid, and visibility on the duration of disruptions is limited.

How have markets reacted so far?
Oil prices have swung sharply , reflecting both physical supply disruptions and a significant increase in geopolitical risk. Natural gas prices, particularly in Europe and Asia, have experienced dislocations following LNG facility shutdowns and tight inventories.

Beyond energy, government bond yields have moved higher alongside oil prices, reflecting renewed inflation concerns and reduced expectations for near-term central bank easing. Historically, energy price shocks tend to pass through quickly to headline inflation and, if sustained, can influence core inflation and rate expectations.

The dollar has strengthened on safe-haven demand. Stocks most exposed to higher energy prices, notably airlines, have sold off, while regional markets that are more dependent on energy imports, such as Europe and Japan, are under pressure. Yet at the index level resilience persists. The S&P 500 is down just 0.7 per cent year-to-date through March 10; the FTSE 100 is up 4.8 per cent.

What is our outlook?
Higher inflation in the short run is highly probable, but it should mostly fade when energy prices retreat, though our outlook for 2026 was already for more persistent inflation. We still expect a solid growth environment in 2026, with greater downside risks outside of the US, particularly if the conflict doesn’t resolve in a reasonable time frame, though we do not believe that the Trump administration wants a lengthy conflict. In the meantime, volatility will create both dislocations to manage and mispricing to exploit.

Absent of sustained damage to production capacity or prolonged route closures, we expect prices to stabilize as supply responses emerge and demand adjusts. Over time, risk premia should fade, allowing energy prices to realign more closely with underlying supply/demand fundamentals.

The conflict could further lift commodities and resource equities in the near term, but sustained inflation and lower growth risk destabilizing global markets, while they favor more defensive sectors, such as utilities.

What are the key risks?
The primary risk is a sustained restriction of shipping through the Strait of Hormuz, which would likely push oil prices higher and strain global supply chains.

If elevated energy prices persist, the risk of demand destruction increases, particularly in energy importing regions. History suggests that sustained price shocks can slow growth, exacerbate inflation pressures and complicate monetary policy decisions. A recession, while unlikely, would pressure most risk assets.

How could this impact the global economy?
Energy inflation reduces real purchasing power and pressures margins, with more pronounced effects in Europe and parts of Asia, where dependence on imported energy is higher.

The US is more insulated given its status as a net energy producer, but higher gasoline and utility costs can still weigh on consumer confidence and spending. A sustained shock would raise stagflationary risks globally.

Volatile energy prices increase the likelihood that inflation remains elevated, limiting central banks’ ability to ease aggressively. While policymakers often look through short-term supply shocks, the risk rises if energy price increases feed into core inflation or inflation expectations.

As a result, bond yields have become more sensitive to moves in oil prices, and financial conditions could tighten further if volatility persists.

How are our portfolios positioned?
Recent events and volatility create differentiated impacts and opportunities across real assets strategies. Our portfolio positioning continues to balance near-term support from higher energy prices against the longer-term risk that sustained inflation and slower growth could weigh on broader risk assets. We expect to take advantage of mispricing opportunities.

Natural resource equities: Elevated geopolitical risk and higher energy prices have been supportive, particularly for energy-linked equities. Oil producers and companies with direct sensitivity to higher crude and European natural gas prices have benefited, while a more extreme escalation could be a key downside scenario if inflationary pressures were to materially weaken demand.

Energy: Oil exposure has benefited from rising prices, while natural gas markets, especially outside the US, have seen sharper dislocations tied to LNG supply risks. Companies with direct exposure to US LNG exports have been relative beneficiaries, reflecting Europe’s reliance on imported supply.

Metals and mining: Precious metals have served as a partial hedge against geopolitical uncertainty, though rising yields and a stronger dollar temper near-term performance. Certain industrial metals tied to energy-intensive production are sensitive to regional supply risks and power costs. Recent geopolitical events – not just the conflict in Iran – underscore minerals’ critical importance to political and economic stability.

Global listed infrastructure: The asset class has historically provided defensive characteristics. Fee-based and regulated models offer stable cash flows with cost passthrough capabilities. Midstream assets are largely insulated from commodity price volatility via long-term, contracted revenues. By contrast, transportation infrastructure faces greater risk from trade disruptions and reduced activity.

Real estate: REITs are well positioned for an environment of lower growth and macro uncertainty. Stable business models and limited exposure to global trade flows provide resilience. The primary risk – consistent with broader markets – is prolonged conflict increasing stagflationary concerns that slow growth and delay expected rate cuts.

Diversified real assets: We are overweight both natural resource equities and global listed infrastructure, where robust growth expectations are driving relative value attractiveness. We continue to hold an underweight in commodity futures, primarily on valuation concerns following a period of broad price strength. Stagflationary risks are contributing to a modest underweight in real estate, while a small overweight in the portfolio’s short-duration fixed income sleeve reflects our more cautious risk stance.