“In the middle of difficulty lies opportunity.”
Markets have a long and well documented history of looking through disruptive geopolitical events, even when the headlines feel overwhelming. Time and again, investors have correctly assumed that rational actors ultimately resolve their differences in ways that preserve long term economic stability. As a result, the initial reactions we see during periods of tension often prove temporary. Sharp moves in oil prices, a stronger US dollar, and rallies in defence stocks are all familiar patterns, and this recent conflict in Iran has followed that same script.
It’s important to remember that markets are driven by a wide range of participants. Short term algorithmic strategies can amplify volatility, while long term fundamental investors often step in to buy on weakness. Retail investors have shown a Pavlovian desire to buy the dip after so many years of policy support for waning markets too. Some of that stabilising behaviour has already begun, even if it hasn’t yet fully offset the initial swings. As the situation becomes clearer, markets typically normalise.
This is precisely why our portfolios are built with diversification at their core. A mix of asset classes is designed to try and absorb shocks, adapt to uncertainty, and remain resilient through events that, while unsettling, are neither new nor unexpected in the broader sweep of history.
There are plenty of unknowns. We don’t yet have full visibility into the strategic objectives behind recent actions, nor how Iran may choose to respond in the long term. But history suggests that rationality tends to reassert itself, and hopefully, those in positions of power will ultimately recognise the value of de escalation and negotiation.
What the US-Iran conflict means for markets
For months, global markets have been climbing steadily, buoyed by resilient earnings and late cycle momentum. Then the US–Iran conflict erupted, sending tremors through oil markets, equities, and investor sentiment. Volatility returned with force.
And yet, beneath the noise, something familiar emerged: perhaps this was the kind of pullback that often follows a period of exuberance. The catalyst was unknown, but the correction itself was not.
The question now is where markets go from here. In our view the answer depends on which of three geopolitical paths the world takes next.
- Protracted kinetic war
The first path is the most challenging for markets; a prolonged, escalating conflict between the US and Iran, and perhaps a growing list of active combatants. It is the scenario with the highest probability of long term economic damage, and the one that markets fear most.
A drawn out war would almost certainly depress global growth. Energy markets, already strained, would face sustained disruption. Food supply chains could be affected. Inflation, instead of easing, would become more volatile and more entrenched. The world has seen versions of this before, but the interconnectedness of today’s supply chains magnifies the risks.
Markets heavily dependent on imported energy, such as Japan, Korea, parts of Asia, many emerging markets, and Europe, would be particularly exposed. Their vulnerability is structural: higher energy costs feed directly into corporate margins, consumer spending, and industrial output.
In this environment, the investment landscape likely shifts from inflationary boom to inflationary bust, or stagflation, where growth deteriorates even as prices remain stubbornly high. In this environment, diversification becomes harder, correlations tend to one, and defensive assets struggle to provide shelter. Equities are at the greatest risk. - Regime change in Iran
At the opposite end of the spectrum is regime change in Iran, a potentially transformative scenario. It is not our base case, but it is a scenario with profound implications for markets.
If the conflict were to culminate in a political transition that leads to regional de escalation and the reopening of energy markets, the economic fallout would be far more contained. Inflationary pressures would likely moderate. Oil prices could fall sharply, perhaps lower even than before with supply turbocharged and sanctions lifted. Supply chains might begin to normalise.
In this scenario, the investment environment could snap back into an inflationary boom, driven by strong demand, improving supply dynamics, and a weaker US dollar. Emerging markets would benefit. Value stocks would find renewed momentum. Industrial metals and miners, already buoyed by global capex cycles, could accelerate further.
The main uncertainty is how much of this scenario markets have already priced in. Many investors still assume the conflict will be short-lived. If that assumption proves correct, the rally in risk assets could resume. If not, the repricing could be severe. - US declaration of victory and cessation of war
The third scenario is the most ambiguous, sitting between the first two. But it’s perhaps the most realistic in the near term: the US declares victory, kinetic operations cease, but the region remains unsettled.
This outcome would not resolve the underlying tensions. Israel’s response is uncertain. Localised factions could continue to disrupt oil supply routes. The region could oscillate between calm and flare ups, each capable of sending oil prices swinging.
The economic implications are murky. Growth could stabilise, or it could falter if energy volatility persists. Energy price volatility is felt first by consumers and latterly by companies. Inflation could ease, or it could spike intermittently. Markets could rally, or they could remain trapped in a cycle of relief and anxiety.
Fixed income becomes attractive if recession risk becomes imminent, when oil prices spike sharply enough to threaten global demand. In that moment, shorter duration bonds could offer protection. Until then, the case for bonds as diversifiers remains weak.
How our portfolios reflect the changing environment
Despite the headlines and volatility, our belief is the investment environment has not yet fundamentally changed. Markets were already in a late cycle phase. Valuations were stretched. A pullback was overdue.
The longer the conflict continues and the wider it spreads, the greater the probability that the world shifts into an inflationary bust. That is the tipping point we’re looking out for.
We’ve made some adjustments to portfolios. We halved our exposure to gold miners, a more defensive trade, locking in significant gains. These proceeds have been redeployed into Japan and emerging markets, two long term themes that experienced short term weakness during the initial volatility.
This positioning reflects a view that the market may be broadly correct: that the conflict may be relatively short in duration, with contained long term economic impacts and limited sustained pressure on oil prices. For now, the investment environment remains intact. But the longer the conflict persists, the more the risks increase.
Private credit’s cracks are showing
For years, private credit has been a staple of many wealth portfolios, offering steady income and low volatility. But today there are serious strains emerging across parts of the market, whose ripples could potentially run deep.
After 2008, regulators pushed certain types of lending out of the banking system to protect retail depositors. Private credit funds then stepped in, raising huge sums, including from retail adjacent investors, and deployed capital into a finite universe of opportunities. Too much money chased too few deals, returns compressed, and discipline, both underwriting and in portfolio diversification, seemingly slipped.
The concentration in software lending is a good example. Between 2018 and 2022, private equity deals were mostly software focused, and private credit followed. Then came the acceleration of AI, raising serious questions for many of those business models. If the companies struggle, the loans struggle.
But the deeper structural flaw is liquidity. Direct lending loans are long dated and illiquid, yet many funds were packaged as semi liquid vehicles offering monthly or quarterly redemptions. When investors want their money back, there just isn’t the liquidity to repay it. Income from the loans can’t meet withdrawals, and selling the loans would mean crystallising losses. The result looks uncomfortably like a run on the bank.
It’s for these reasons and others as to why we’ve generally avoided the asset class . If you’re locking up capital for years, you should be targeting equity like returns, not credit like ones. We also avoid strategies where the liquidity of the fund doesn’t match the liquidity of the underlying assets; a fundamental red flag that is now playing out in real time.
Will the cracks in private credit become a systemic issue? The jury is still out. What’s clear is that parts of the market were built on optimistic assumptions, abundant capital, and structures that were never designed for stress.
However, not all private credit is broken. We believe selective, well underwritten strategies still deserve a place in diversified portfolios. But the broader market is facing a reckoning, and investors should be clear about the risks when credit, public or private, still looks asymmetrically priced the wrong way.
Investment strategy and outlook
Going into 2025, we positioned portfolios to be robust in the face of multiple outcomes. There were plausible paths to both extremely strong and extremely negative outcomes, particularly in the US. In the end, the groundwork we had done previously in positioning the core of the portfolio for a broadening-out of equity markets bore fruit, with some of our highest conviction areas of opportunity, namely Japanese, EM, and value equities, all driving strong returns. Our other more tactical position in gold miners was the standout performer in the portfolio. Our thesis going into the year was that the gold mining stocks were set to continue a period of ‘over earning’ and that there was sufficient support for the underlying metal from central bank buying for us to have a meaningful allocation to both assets.
We entered this year remaining constructive on global growth and therefore on equities, continuing to tilt the core of the portfolio to the areas of opportunity mentioned above, but maintaining targeted exposure to US growth stocks through exposure to the Nasdaq and to symmetric upside via a call spread on the S&P 500. We are trying to build resilient portfolios given the continued levels of uncertainty and higher valuations, without taking a big bet on any one particular outcome. The first two months of the year delivered returns consistent with this theme playing out with strong returns from some of 2025 leading investments, including EM, Japanese, value, and small-cap equities.
By maintaining a carefully hedged allocation to equities with an active management tilt and long/short strategies, we are positioned to benefit from further upward momentum without taking on the full extent of the downside risk. Equities are not that cheap, but we think it’s worth taking a position in the equities we have conviction in, albeit in a risk-controlled way. We have deliberately positioned the portfolios with asymmetric exposure to both positive and negative market outcomes.
The economic environment still warrants caution. Our hedging strategy, allocation to alternative strategies, and equity positioning are designed to help weather sharp market swings, effectively smoothing the investment experience.
January delivered further evidence of a change in leadership in markets which appears to have started in the latter part of 2025; value equities have been materially outperforming growth. Whether this is the beginning of a sustained tectonic shift from growth to value, or more of a mid-cycle style rotation remains to be seen. But for now, our portfolios are benefitting from the broadening out of returns, and a greater focus from investors on previously unloved stocks within value, ex-US, and notably small caps. As markets have broadened out, the easy money that was to be made in the US in previous years from multiple expansion is unlikely to be delivered again. It will now be down to earnings to deliver returns across more of the world after the repricing we saw in 2025.
Since the end of February, the events surrounding the conflict in Iran have impacted markets. The portfolio has performed as we would have expected, with some investments deemed to be more at risk from higher energy prices - such as Japanese and EM equities - suffering losses. The diversification in the portfolio has helped, and we remain both optimistic for the longer-term opportunities, and alert to rising risks stemming from a protracted or expanded conflict.
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