As the military strikes by the U.S. and Israel against Iran have now lasted over a month, former U.S. President Donald Trump claimed that the conflict could conclude within the next two to three weeks, with a potential agreement reached before that. However, Iran has denied requesting a ceasefire and emphasized its control over the Strait of Hormuz.
Will the Middle East conflict end soon? What impact will it have on the global economy and financial markets? How should global asset allocation strategies be adjusted? These questions have become the focus of attention for major global asset management firms.
Thomas Mucha, a geopolitical strategist at Wellington Management, stated that although it is necessary to prepare for various potential outcomes in such a volatile geopolitical environment, his baseline judgment is that the conflict will persist for weeks or even longer. Mucha believes that while the military actions of the U.S.-Israel alliance have effectively weakened Iran’s cruise and ballistic missile capabilities, drone operations, air defense systems, naval assets, nuclear facilities, and command and control infrastructure, these successes have not yet translated into a lasting political solution or a negotiable exit path, let alone forced concessions or regime collapse in Iran.
For investors, this distinction is critical because market pricing reflects unresolved political risks rather than battlefield gains or losses. In Mucha’s view, the conflict has evolved from a strike-led operation into a test of political endurance and escalation risk management—issues that tend to last longer and are harder to resolve.
Yuan Yao, senior investment strategist for Asia at Amundi Institute, noted that in the short term, both the evolution of the war and market reactions are unpredictable, making risk management essential for investors.
Benjamin Jones, global head of research at Invesco and a Chartered Financial Analyst, suggested that if neither the U.S. nor Iran significantly shifts its stance, oil prices are expected to rise further, equity markets may weaken, and the U.S. dollar is likely to remain strong.
Mucha emphasized that energy has been and will continue to be the most critical variable at the global macro level in this conflict. The key risk, in his view, is not an immediate global recession but the persistence of energy-driven inflation, which complicates central banks’ policy responses. Even a partial disruption of the Strait of Hormuz would raise oil and gas prices due to increased transport costs, war risk insurance premiums, and precautionary stockpiling. If the crisis prolongs, secondary and tertiary economic effects—such as higher costs for key inputs like fertilizers and shipping delays—would further complicate the macroeconomic landscape. These factors are directly linked to inflation expectations and policy credibility, especially in energy-sensitive economies like Japan, South Korea, and much of Europe.
According to Mucha, energy-related challenges are both a policy issue and a growth issue.
Regarding the impact of high oil prices on China’s economy, UBS Global Wealth Management’s Chief Investment Office noted that while rising energy prices may affect growth in the coming quarters, the overall impact is expected to be manageable—around 30 basis points. Even if oil prices reach $120 per barrel within the next six months, China’s ample petroleum reserves, coal-dominated energy structure, and policy flexibility should help maintain economic stability.
UBS Wealth Management expects the next Fed rate cut to be delayed until September 2026, with an additional cut in December, adjusting the federal funds target range to 3.00%–3.25% by year-end—roughly in line with the Fed’s estimated neutral rate.
Wang Xinjie, chief investment strategist at Standard Chartered Wealth Management in China, pointed out that since the Middle East conflict began and oil prices surged, U.S. equities have outperformed other markets due to the country’s relatively lower dependence on energy imports compared to Europe or Asia. He maintains an overweight stance on U.S. stocks.
Wang noted that Asian equities have experienced significant corrections since late February, with Japanese stocks falling more sharply than the rest of Asia excluding Japan. This is not surprising, given Asia’s heavy reliance on energy imports from the Middle East, exposing the region to dual risks from rising oil prices and potential disruptions in physical crude flows.
If the Middle East conflict prolongs the oil price rally, Asian equities may face temporary pressure. However, under Wang’s baseline scenario—where oil price increases last only a few weeks—any further short-term weakness in Asian equities over the next three to four weeks could be seen as a buying opportunity.
Wang also highlighted that inflation risks from oil prices have driven a recent rebound in U.S. Treasury yields. He currently recommends overweighting developed market high-yield bonds and underweighting developed market investment-grade government bonds. Investment-grade corporate bonds in developed markets are viewed as core holdings, while emerging market debt—both dollar-denominated and local currency—remains overweight.
Yuan Yao suggested that market trading logic can be interpreted through two frameworks: at the macro level, markets are pricing in the risk of "stagflation" driven by rising energy prices, leading to declines in both equities and bonds. At the trading level, the trend has been to sell all risk assets except energy, favoring cash instead. While gold theoretically serves as a hedge against stagflation, its rapid earlier gains led to crowded positioning, causing it to become a source of liquidity during sudden risk-off sentiment and resulting in a sell-off.
As the Middle East conflict intensifies and energy shocks worsen, more investors are positioning for a stagflation scenario, reinforcing the "cash is king" mindset. Optimists, however, still hope for a TACO scenario—referring to the idea that Trump may back down—leading to sharp volatility amid overall risk-off sentiment.
In the short term, if initial positions are overweight risk assets, Yuan recommends reducing exposure, increasing cash reserves, and using energy, commodities, or derivatives for hedging. Over the long term, diversification is key to navigating uncertainty. At the asset class level, gold and real assets can help hedge structural geopolitical risks; geographically, allocating to Europe and emerging markets may mitigate the impact of a potential downturn in U.S. outperformance; and sector-wise, diversified exposure can capture disruptive opportunities from AI and the energy transition.
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