War with Iran: Short term disruption is our base case

US and Israeli forces have begun a bombardment of Iran that has so far killed its supreme leader Ayatollah Ali Khamenei as well as the head of Iran’s military and some other senior military leaders. Iran has responded with missile strikes against Israel, US bases in the Middle East, and targets in many Gulf states. Iran has since replaced Khamenei with a three-member interim leadership council which has so far vowed to fight.

Brent crude prices initially jumped 12.6% to just over USD82/bbl, but are currently trading at USD78.5/bbl, about 7.2% higher than before the hostilities began. The Nikkei has opened 2.2% down while US equity futures are about 1% lower. The USD has rallied modestly, less than 1%, against most major currencies except the Swiss franc.

Despite these moves, our Chief Economist, Ray Farris is optimistic that hostilities will be short-lived and will not disrupt the global economy or positive Asian equity outlook significantly.

Iran’s military has been greatly weakened since Israeli and US strikes in July last year and much of its senior leadership has been killed. Much of Iran’s air defence systems have been destroyed and its munitions stores have been denuded. Importantly, Iran’s proxy allies – Hezbollah, Hamas, and the Houthis – have also lost capacity to fight on Iran’s behalf. Meanwhile, Russia is constrained in its ability to support Iran by its war in Ukraine. All of this leaves Iran historically exposed to the far greater military capacity of the Israeli and US forces. However, we note that the US appears to have not deployed large numbers of amphibious vehicles to the Gulf and so does not appear to have any plans for invasion.

Against this backdrop, China is one of Iran’s only meaningful allies. Oil is central to this relationship with China as the largest buyer of Iranian oil. We think this helps to explain why Iran has so far avoided closing the Strait of Hormuz or targeting Gulf oil infrastructure.

This backdrop leads us to expect the US and Iran to come to at least a temporary truce and negotiations soon. Of course, uncertainty is very high and alternative scenarios of more prolonged conflict cannot be ruled out.

If we are right that the crisis lasts only a few weeks, a temporary rise in energy prices is unlikely to weaken global growth much. In the US, the Federal Reserve has cut rates by 75bps since September 2024 and US households should benefit from large tax refunds in March and April this year. Fiscal policy has turned stimulative in Europe as well and although we do not expect a large new stimulus from China this week, China’s policy commitment to GDP growth of close to 5% implies its government will increase stimulus incrementally as necessary through the year.

Crucially, the core of the US capital cycle remains intact. The latest estimates are for US hyperscalers to spend USD656 bn on AI infrastructure this year. Asia will supply most of the tech and capital goods inputs to this, supporting Asian export growth.

This AI infrastructure boom is becoming increasingly global with spending in Europe rising and most governments in Asia having introduced spending and subsidy programs for tech development. All of this supports growth in Asia’s industrial complex. In India, recent improvements in indicators of urban consumption suggest fiscal and monetary policy easing are beginning to boost domestic demand.

The main risk to our benign view is of a prolonged disruption to energy supply from the Gulf region. At the time of writing, Iran has said that it has not formally closed the Strait of Hormuz. However, shipping through the Strait has effectively halted after three merchant ships have been damaged and insurance companies have cancelled insurance cover for shipments and increased insurance rates significantly. OPEC+ announced a larger than expected increase in output of 206k bpd, but much of the spare capacity that facilities this is in the Persian Gulf.

About 19mn bpd of energy transits through the Strait of Hormuz and only about 3.3mn bpd can be redirected through pipelines. This compares to global demand of about 100mn bpd. The full impact of a disruption of supply would require several weeks of closure of the Strait, which currently remains highly uncertain.

China, India, Japan, Korea, are Asia’s largest importers of oil and gas products in absolute terms, but Indonesia, Singapore, Taiwan, Thailand, and Vietnam are all dependent on imported energy with Singapore, Taiwan, and Thailand particularly exposed.

Among these, we expect the INR and the IDR, already weak year-to-date, to be most vulnerable to further weakness. The THB and the PHP are at risk of giving up some of their recent gains if oil prices rise further.

We also expect the hostilities to temporarily stall the CNY given that they come on the heels of policy steps by China’s central bank last week to slow CNY appreciation.

Multi asset

We are keeping a close eye on developments in the Midde East. The key factor remains the length of the crisis and the knock-on impact from potentially sustained higher energy prices on growth and inflation. Broadly, going into the crisis, our portfolios are relatively well protected through a combination of put options which provide some cushion in case equity markets turn sour and long positions in precious metals that should help in providing a buffer from the overall impact of any increase in geopolitical tensions. A large part of the active exposure in our portfolio currently comes from AI-related themes where good earnings support should continue to be a key driver over the medium-term vs knee-jerk geopolitical risks. Additionally, several of our portfolios include systematic risk protection strategies that should also fair well under stress situations. – Eastspring Multi Asset Solutions team.

Fixed income

Fixed income markets are currently distinguishing between headline‑driven volatility and underlying credit fundamentals. Historically, similar episodes have led to short‑term spread widening rather than lasting credit impairment for high‑quality issuers. Our exposure to the region remains selective and investment‑grade biased, focused on higher‑quality sovereigns, quasi‑sovereigns, and strong corporate and financial issuers. This should help to mitigate event‑driven volatility. Issuer fundamentals remain stable, supported by solid fiscal positions and energy‑related revenues in several emerging market sovereigns. Overall, we view this as a volatility event rather than a structural credit event, with no material change in underlying credit quality observed to date. We are actively monitoring developments and remain focused on preserving portfolio quality while delivering attractive risk-adjusted income. – Eastspring Asia fixed income team.

Equities

If our macro base case holds and the hostilities are relatively short-lived, the longer-term drivers of Global Emerging Market equities – a weaker USD, moderate inflation that allows emerging market central banks to cut rates and a benign global macro outlook – should remain intact. The team is monitoring the situation closely, ultimately, remaining actively invested and staying nimble is key. – Steven Gray, Head of Global Emerging Market & Asia Regional Value Equities.

The instability in the Middle East, as well as the ongoing Russia-Ukraine drag on Europe potentially positions Asia as a relatively defensive region within global equities. We do not anticipate any material changes to our valuation targets, and hence any large dislocations in prices may present opportunities to add exposure. Energy, which is a broadly under-owned sector in 2026 may see some mispricing correction, while AI-related themes are likely to return to the forefront of market focus this year. – Sundeep Bihani, Portfolio Manager, Team Leader, Regional Asia Value Equities.

Japan’s reliance on crude oil imports from the Middle East may make it susceptible to a prolonged disruption on oil supply, although sizeable public and private sector stockpiles should help to alleviate near-term supply risks. Preliminary broker estimates suggest that a 10% increase in oil prices could weigh on near-term TOPIX earnings by around 1-1.25%, reflecting margin pressure in energy-sensitive sectors. The degree of cost pass-through will become increasingly important if elevated oil prices persist. Concerns over higher input costs have weighed on chemical companies today, although the moves have largely tracked the broader market. Many of these companies have also been repositioning themselves towards higher-margin growth industries (e.g. Technology, Medical). Historically, oil prices tend to spike at the onset of geopolitical tensions as markets price in supply risks, but often stabilise as supply routes adjust, arguing against premature reactions. Meanwhile, selected AI capex-related stocks have remained resilient today, supported by perceived earnings and growth certainty. Nevertheless, we note that positions in some of these names are still crowded and valuations remain elevated. We are monitoring the developments and will take advantage of any price dislocations whilst remaining focused on delivering through-cycle long-term returns. – Ivailo Dikov, Head of Japan Equities.

Concerns over the potential disruption of global energy flows could translate into higher volatility across equity markets in the near term. This backdrop highlights the importance of diversification and having defensive strategies in portfolios. Looking through the prism of past conflicts including the Russia–Ukraine war, the Iran–Israel escalation in 2024, and the Twelve Day War in 2025, Asian low volatility strategies have historically provided meaningful downside protection and demonstrated relatively resilient performance during periods of heightened uncertainty. – Michael Sun, Client Portfolio Manager, Quantitative Strategies.