Market Compass March 2026

Highlights:

• The stated rationale for the attack on Iran is clear – Iran’s refusal to renounce nuclear weapons – but the end target is not, which makes it hard to forecast the duration of the war. The minimum target is to change the regime’s behaviour. Our base case is a few weeks of war. We see the risks – a durable escalation or quick de-escalation – as symmetrical.
• Oil prices are up some 18$ this year. A 10$ increase undermines US GDP by 0.1-0.2pp over 12 months. Europe is not self-sufficient so the impact is slightly larger, more so with gas prices rising faster. Asia receives 80% of the transit through the strait of Hormuz, so is most exposed. A short-lived energy price spike will not destroy an otherwise steady global economy.
• We keep the duration marginally short. Our bias was for slightly higher yields, but recent concerns about AI’s impact on the labour market had led us to reduce the short. We had recently reduced our risk exposure in Equities but also in Financial Credit, not least on fears of collateral damage from the AI rotation trade.
• Unless the war spirals out, we would rebuild risk exposure on dips in the coming weeks, particularly in Euro Credit. We maintain a cyclical tilt in Equities, while sticking to defensives such as Pharma, Utilities, Telecoms, and inflation hedges. Such balanced portfolios can still perform well in a ceasefire scenario, as fiscal spending and commodity scarcity persist.
   

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