Geopolitical developments in the Middle East have dominated financial market moves in the last six weeks. On April 7, the U.S. and Iran agreed a temporary two-week ceasefire. However, the truce remains uncertain given unresolved disagreements, especially around control and tolling of the Strait of Hormuz. Formal negotiations toward a permanent peace deal between the U.S. and Iran have failed to secure a solution, at least for now. Tanker traffic through the strait remains largely at a standstill. President Trump’s announcement that the U.S. would blockade ships entering and exiting Iranian ports points to ongoing uncertainty for the global energy supply, with a risk of further (even if temporary) escalation.
In addition to our thinking on the longer-term outlook for government bonds, credit, equities and foreign exchange in our latest Global Markets Overview, we’ve mapped out three macro-energy scenarios and the illustrative actions for longer-term portfolio risk management and potential shorter-term return opportunities.
| Scenario | Contained retaliation | Material disruption | Further escalation |
|---|---|---|---|
| Illustrative strategic risk management actions | None; short time horizon of impacts. | None; short time horizon of impacts. | Reduce equity/credit assets; reduce govt. duration; add inflation-linked assets, add U.S. dollar exposure. |
| Illustrative dynamic potential return opps. and risk management actions | Overweight (o/w) global equity; (o/w) diversified alternative credit vs. investment grade; underweight (u/w) nominal government bonds; o/w inflation-linked bonds; u/w U.S. dollar. | Reduce o/w to global equity; increase u/w to nominal government bonds; increase o/w to inflation-linked bonds; reduce u/w to U.S. dollar. Understand crucial regional market differences. Understand policy responses – govt. support lowers growth risk and raises inflation risk. |
Strategic risk management is highest priority. Our view: the risk of a multi-year high inflation and low growth outcome remains low - no strategic risk management action. |
| 2026 and '27 indicators | U.S.-Iran military conflict ends in early April; no new impacts on energy export capacity. Energy flows through Strait of Hormuz recover in April. |
Economic conditions/asset prices materially different at end-2026. Military conflict runs through April; or additional energy infrastructure damage; or energy flows through Strait remain very low in April/May. |
Economic conditions/asset prices materially different at end-2027/'28. Long-run multi-year disruption to energy supply. |
| Illustrative macro impacts | Low impacts to growth, core inflation, and asset prices at end-2026 as shock is short-lived. Oil price falls to c.$70/bbl by end-2026. |
Materially weaker growth and/or higher core inflation at end-2026; weak sentiment; conditions normalize in 2027. Major regional differences. Oil at c.$90-100/bbl at end-2026. |
Recession; much higher core inflation, higher real interest rates. Oil at c.$110/bbl at end-2027. |
| WTW est. likelihood | Most likely | Material likelihood | Unlikely |
We remain committed to monitoring these developments and will continue to provide timely insights as the situation evolves.
