Equity outlook: From positive to perilous

After a full month of war in Iran and the wider Middle East, we appear further away from a resolution, and markets are responding accordingly. Our constructive view on equities for 2026 is in peril. Oil and refined product inventories in key locations are shrinking, LNG cargoes are subject to a bidding war as both Asia and Europe try to restock, while the impact on other commodity markets, like grains, fertilizer and aluminum, is yet to be fully felt. All this adds up to inflationary pressure, which obviously isn’t good for the global economy and equities.

It’s now a known known that you should stay invested through crises, conflict and shock. From a long-term perspective this is undeniable, but it’s also becoming reflexive behavior in markets. The dynamics this month have been remarkable, with the muscle memory of the rapid equity market snapback after ‘Liberation day’ this time last year still fresh. You can feel the desire to return to risk-on at every hint of a ceasefire.

We have to face reality though, and while we hope for off-ramps to materialize for all parties to bring a speedy end to this conflict, at the time of writing the US is still assembling ground forces in the Middle East, and attacks on vital infrastructure from different sides are becoming more frequent.

As long-term investors we have been working hard to protect our portfolios. Our significant established investments in the renewable energy sector have helped, while positioning in traditional energy segments in our global and European equities strategies have acted as partial hedges. Beyond seeking inflation protection, the secular themes we track are largely intact.

For example, the AI theme in both the US and China, where energy remains abundant, are still in our sights. Also, while the oil-price shock and recent USD strength have been a challenge for emerging markets, the long-term EM thesis remains valid, with strong macro fundamentals, lower debt and geopolitical optionality all worth investing in, as Wim-Hein Pals discusses in our EM outlook. Our Latin America analyst João Giesta writes about his findings from a recent visit to Argentina and Chile, while portfolio manager Richard Purkiss gives a fascinating perspective on the ongoing revolution in the pharmaceutical sector.

Let’s hope the conflict turns out to be short-lived and we have a more positive backdrop for equities by the start of the third quarter.