Trust Economics, the Εconomic Research and Consulting firm, expects a 58% chance of some form of US-Iran ceasefire by the end of April. But even if a ceasefire is achieved within that timeframe, normalization in the Strait of Hormuz will be much slower. Normality, Trust Economics notes, does not expect to return to “normal operation” until at least the end of the third quarter.
New strategy
Continuing, it points out that Brent oil will remain above $100 for most of the next three months, while inflation expectations and economic conditions have worsened.
On the other side of the war, hopes for a ceasefire in Ukraine in 2026 (an issue that has been almost forgotten) have declined sharply since last December.
At the same time, due to the war, investment strategies will have to be rapidly reshaped and be ready for change by limiting their “increased positions” in stocks and increasing cash positions at the fastest possible pace.
The bearish climate is a given, as the war and concerns about private credit “end” the bullish investment climate of recent months.
Expectations for higher inflation in the next 12 months soared, while conversely expectations for interest rate cuts declined over the same period.
The risk
Expectations for stronger growth have also collapsed in anticipation of a stagflationary environment. Geopolitical conflicts are now the number one risk for markets and economies, while a systemic credit event could come from private equity and private credit.
The private credit market is entering a phase of increased pressure, considering that there is no systemic risk, but a clear shift towards risk repricing.
The main conclusion is that the system is not collapsing, but the cost of funding is increasing and conditions are becoming more demanding. Although banks’ exposure is considered manageable, concerns are growing about the impact on spreads, default rates and the credibility of ratings, as the cost of funding for riskier borrowers has already increased by up to 400 basis points, a development that is likely to continue.
This is restricting access to capital and intensifying pressures across the market, from leveraged loans to high yield and investment grade.
A sharp decline
Overall, during the war, stocks have fallen, bond yields have risen, while fears of a 2022-style inflationary shock have led derivatives market participants to fully discount the Fed’s inability to cut rates this year, supporting the dollar and pressuring gold, a traditional safe-haven asset.
Gold has fallen more than 16% this month, heading for its steepest decline since October 2008, though it remains nearly 50% higher than a year ago as the war and the search for liquidity have seen many investors sell positions in precious metals, including gold and silver.
Gold was also trading nearly 30% above its 200-day moving average just before the Middle East conflict began, and as it was in all institutional portfolios, the sell-off in search of cash when the conflict broke out contributed to its decline, despite its reputation as a safe haven. The same is true for European defense companies.
The Ups and Downs
As the Middle East crisis continues, a prolonged disruption in global energy markets is the key risk to markets.
While investors should not expect a quick return to normality, as “market timing” on geopolitical events has historically failed, Trust Economics suggests that investors should not look for the best entry or exit point, but since it expects the year to end with higher equity prices and lower bond prices, it believes that increased volatility can be an opportunity for gradual capital placement.
With economies set to grow slightly lower than expected in February, any negative developments could reduce global growth below 2% and increase global inflation above 4%, reinforcing the risks of a recession.
Uncertainty
The global economy is now more resilient than in previous decades, however, due to reduced energy intensity and increased flexibility.
However, supply chains for critical goods such as fertilizers and semiconductors are at risk, and increased uncertainty could dampen consumption and investment. Asia, particularly Korea, Japan and India, are facing the greatest difficulties due to their heavy dependence on imported fuels and exposure to disruptions in the Strait of Hormuz.
In contrast, the United States and Canada are in a comparatively good position as net oil exporters. Global spending on oil and its products, however, rose by about $2 trillion at current prices to $4.6 trillion a year, from $2.6 trillion in January.
