Response strategies amid Middle East conflict, global asset management giants discuss heatedly!

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【Overview】How should asset allocation be adjusted today? Global asset management giants weigh in

China Fund News reporter Guo Wenjun

The U.S. and its ally’s strike on Iran has been going on for more than a month. U.S. President Trump has said it could end the war with Iran within the next two to three weeks, and that an agreement with Iran may be reached before then. However, Iran has denied requests for a ceasefire and emphasized control of the Strait of Hormuz.

Will the Middle East conflict end soon? What impact will it have on the global economy and financial markets? How should global asset allocation strategies be adjusted? These questions have become the focus of attention for major global asset management giants.

Will the conflict really end quickly?

Thomas Mucha, a geopolitical strategy analyst at Wellington Investment Management, wrote: “Although we need to be prepared for every potential outcome in such a highly turbulent geopolitical environment, my baseline view is that this conflict will last for several weeks—or even longer.”

Thomas Mucha believes that the military operations of the U.S.-Israeli coalition have been effective, significantly weakening Iran’s cruise missile and ballistic missile capabilities, unmanned aerial combat capabilities, air defense systems, naval assets, nuclear facilities, and command-and-control infrastructure. Even so, at the strategic level, the operation remains incomplete. U.S.-Israeli military success has not yet translated into a durable political solution, nor has it produced a negotiable exit path—let alone resulted in concessions from Iran’s regime or its collapse.

Thomas Mucha points out that this distinction is crucial for investors because the core of market pricing is political risk that has not been resolved yet, rather than gains and losses on the battlefield. In Thomas Mucha’s view, the conflict has evolved from an action led primarily by strikes into a game testing political endurance and escalation risk management. And issues like this tend to last longer and be harder to resolve.

Yao Yuan, Senior Asia Investment Strategist at Orient Asset Management Investment Research Institute, believes that in the short term, both the evolution of future wars and market reactions are unpredictable, so investors need to focus on risk management.

How much does high oil price affect the global economy?

Benjamin Jones, Head of Global Research at Invesco, CFA, says that if neither the U.S. nor Iran’s positions change materially, oil prices are expected to rise further, stock markets to weaken further, and the dollar to remain strong.

Thomas Mucha said: “In this conflict, energy has already and will continue to be the most critical variable at the global macro level. I think the key risk is not an immediate recession in the global economy, but the persistence of energy-driven inflation, which makes central banks’ reaction functions more complex.”

Thomas Mucha believes that even if the Strait of Hormuz experiences only partial disruptions, transportation costs, war-risk insurance premiums, and precautionary stockpiling behavior will all push up oil and gas prices. In addition, if the crisis drags on, the secondary and tertiary economic impacts (for example, rising costs of key inputs such as fertilizer) will further exacerbate macro-level complexity. All of these are directly tied to inflation expectations and policy credibility—especially in economies that are already sensitive to energy prices (such as Japan, South Korea, and much of Europe).

In Thomas Mucha’s view, issues in the energy sector are both policy issues and growth issues.

As for how high oil prices will affect China’s economy, the Chief Investment Officer (CIO) Office at UBS Wealth Management notes that although rising energy prices may affect growth to some extent over the next few quarters, the overall impact is expected to be manageable (around 30 basis points). Even if oil prices rise to $120 per barrel within the next six months, China’s economy is expected to remain resilient, supported by China’s ample oil reserves, a coal-dominated energy structure, and policy flexibility.

UBS Wealth Management expects that the next rate cut by the Federal Reserve will be postponed to September 2026, with another cut in December (previous expectations were June and September). By the end of the year, the target range for the federal funds rate will be adjusted to 3.00%—3.25%, broadly consistent with the neutral rate level estimated by the Federal Reserve.

How should you adjust your investment strategy?

Wang Xinjie, Chief Investment Strategist at Standard Chartered China Wealth Management Department, said: “Since the outbreak of the Middle East conflict and oil prices subsequently surged, U.S. stock performance has been better than other markets, because compared with Europe or Asia, the U.S. is relatively less dependent on energy imports. We maintain an overweight stance on U.S. equities.”

Wang Xinjie noted that Asian stocks have seen a relatively large pullback since late February. Japan’s stock declines have been greater than those of Asia (excluding Japan) markets. This isn’t surprising, because Asia relies heavily on importing Middle East energy and faces double risks of higher oil prices and reduced flows of physical crude oil.

Wang Xinjie said: “If the Middle East conflict causes the oil price uptrend to continue, Asian stock markets may face temporary pressure. However, under our base scenario, if oil prices rise for only a few weeks, we would treat further near-term weakness in Asian stock markets over the next 3 to 4 weeks as a buying opportunity.”

Wang Xinjie also pointed out that the inflation risk brought by oil prices has driven a rebound in U.S. Treasury yields recently. He said: “We are currently overweighting developed-market high-yield bonds and underweighting developed-market investment-grade government bonds. We view developed-market investment-grade corporate bonds as our core holdings, and we remain overweight on emerging-market debt (including U.S. dollar-denominated bonds and local-currency bonds).”

Yao Yuan believes the market’s trading logic can be explained through two frameworks. At the macro level, the market is trading the risk of “stagflation”—resulting from rising energy prices—which leads to a double hit to both stocks and bonds. At the trading level, the logic is to sell all risk assets (except energy), with cash as king. Gold can theoretically hedge against stagflation, but because it rose too fast earlier, trading has become crowded; when risk-aversion sentiment surges, gold instead becomes a “cash dispenser,” suffering a “wrong-side selloff.”

Yao Yuan believes that as the Middle East conflict grows more deadlocked and the energy shock becomes more severe, more and more investors start trading the “stagflation” outlook, leading to cash becoming king. Optimists still have hope for TACO (Trump always chickens out, Trump Always Chickens Out), and while the market overall trends toward risk aversion, the long-versus-short debate comes with sharp volatility.

“As for the short term: if the initial position is overweight risk assets, we recommend reducing risk exposure and increasing cash reserves, and using energy, commodities, and derivatives to implement appropriate hedges.” Yao Yuan said, “In the long run, diversified allocation is the core approach to dealing with uncertainty. At the asset-class level, it’s recommended to hedge geopolitical structural risks through gold and real assets. At the regional level, reduce the impact of the U.S.’s ‘single standout’ retreat by allocating to Europe and emerging markets. At the sector level, use diversified allocation to capture disruptive opportunities brought by AI and the energy transition.”

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