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By Rob Crookston, Investment Strategist at Bell Potter Securities – on behalf of Tandem Securities (part of Bell Financial Group ASX:BFG)
When military conflict broke out on 28 February 2026, global markets were confronted with one of the most significant energy disruptions in modern history. The Strait of Hormuz—through which nearly 20% of global oil supply flows—was effectively closed to normal tanker traffic. The immediate consequence was a sharp spike in oil prices and a surge in volatility across global risk assets, but the broader implications extend far beyond energy markets.
Unlike previous geopolitical shocks, the scale of this disruption is unusually large. Historical events such as the Yom Kippur War, the Iranian Revolution, the Iran–Iraq War, and the Gulf War each removed around 4%–6% of global oil supply. The current situation is estimated to be three to five times larger, making it one of the most significant supply shocks in decades.
While markets have focused on the oil price reaction, the more important investment story lies in how this shock flows through four key transmission channels: global growth, inflation, interest rates, and risk premia. These channels willultimately determine the trajectory of markets over the next 6–12 months.
Four key transmission channels
The first channel is global growth. Higher oil prices act as a consumption tax, reducing household disposable income while increasing business input costs. This compresses corporate margins and slows economic activity globally. Transport, manufacturing, and freight-intensive sectors are particularly exposed as energy costs feedthrough global supply chains.
The second channel is inflation. While headline inflation responds quickly to energy price spikes, the moreimportant issue is second-round effects. Higher freight and goods costs embed energy inflation into core CPI, raising inflation expectations and com-plicating central bank decision-making. Whether this shock remains “transitory” or becomes embedded in core inflation is critical for policy outcomes.
The third channel is interest rates. Central banks are now caught in a stagflationary dilemma: tighter policy risks deepening the growth slowdown, while looser policy risks de-anchoring inflation expectations. Any shift inrate expectations has an immediate impact on equity valuations through discount rates, particularly in interest-ratesensi-tive sectors.
The fourth channel is risk premium. As uncertainty rises across growth, inflation, and policy, investors demand higher compensation for holding equi-ties. This manifests in higher volatility and lower valuation multiples, even if earnings remain stable. Importantly, it is the interaction of all four channels—not any single factor—that drives sustained market repricing.
The macro picture: Stressed but stable
Despite heightened volatility, financial conditions suggest the system remains under stress but not under breakdown.
Inflation expectations provide a key signal. One-year forward inflation has risen to around 3.4%, reflecting immediateenergy pressure. However, long-term breakeven inflation remains anchored, indicating that markets still view the shock astemporary rather than structural. This supports the view that central bank credibility remains intact.
In energy markets, Brent crude has moved into backwardation, with spot prices above $100 while late-2026 futures sitcloser to $85. This suggests markets expect near-term disruption but not a permanent loss of global supply.
Credit markets also remain stable. US high-yield spreads have widened but are well below levels associated with financial stress. The US dollar has strengthened on safe-haven demand, but not to crisis levels. Treasury markets show a bear-flattening yield curve, indicating slower growth expectations but no recession pricing.
European gas prices have risen sharply due to LNG supply concerns, but remain well below the extreme lev-els seenduring the 2022 energy crisis. Overall, the message from markets is clear: elevated risk, but no systemic breakdown.
Searching for an off-ramp
The base case remains de-escalation, supported by both political and eco-nomic incentives.
In the United States, the political calendar is increasingly relevant. With midterm elections approaching, pro-longed conflict in the Middle East is unlikely to be politically advantageous, particularly as higher fuel prices feed directly into inflation-sensitive voter sentiment. Early signals already suggest a preference for diplomaticresolution over sustained escalation.
Iran’s domestic economic con-straints also support negotiation. The economy was already under pressurebefore the conflict, and prolonged dis-ruption to energy exports is economi-cally damaging. This creates incentives on both sides for a negotiated off-ramp, even if tensions remain elevated in the short term.
While risks remain—particularly through proxy groups and attacks on infrastructure—regional conflictshistori-cally tend to peak before transitioning toward negotiation once economic and political costs accumulate.
In a de-escalation scenario, oil prices would likely fall, inflation expectations would stabilise, and cen-tral banks would be able to maintain their “transitory shock” narrative. This would support a rapid stabilisation in risk assets.
Lessons from history: Markets move early
Historical precedent reinforces a key investment principle: markets price for-ward, not backward.
During the Gulf War, equity mar-kets bottomed in October 1990 at the peak of uncertainty and oil prices, well before the conflict ended. By the time hostilities formally concluded in early 1991, markets were already in recovery.
This pattern is consistent across geopolitical cycles. The most attrac-tive entry points for risk assets tend to occur when uncertainty is highest and sentiment is weakest, not when clarity returns.
If credible de-escalation signals emerge in the current environment, his-tory suggests the window to increase risk exposure may be both narrow and fast-moving.
Portfolio positioning: A barbell approach
In this environment, we recommend a cautiously constructive stance using a barbell strategy combining quality and value exposures.
Quality equities provide resilience through strong balance sheets, stable earnings, and defensive cash flow characteristics. These assets help pro-tect portfolios if geopolitical conditions worsen or inflation remains elevated for longer than expected.
Value equities, on the other hand, offer upside participation in a recovery scenario. If risk premiums compress and oil stabilises, value-oriented sectors typically outperform sharply as valua-tions re-rate higher.
A blended approach has already demonstrated effectiveness. A 50:50 allocation to MSCI World Quality and MSCIWorld Enhanced Value has outperformed broader global equities year-to-date, highlighting the benefits of diversificationacross factor styles in volatile markets.
DISCLAIMER: Tandem Securities, Tandem Clearing and Desktop Broker are registered business names of Third Party Platform Pty Ltd (TPP), ABN 74 121 227 905, Australian Financial Services License (AFSL) 314341. TPP is a Market Participant of ASX Limited, Trading Participant ofCboe Australia Pty Ltd, Settlement Participant of ASX Settlement Pty Ltd and a Clearing Participant of ASX Clear Pty Ltd. Tandem Capital is a registered business name of Bell Potter Capital Limited (BPC), ABN 54 085 797 735, AFSL No. 360457. BPC is licensed to offer Margin Lending Services. Tandem Securities, Tandem Capital, Tandem Clearing and Desktop Broker do not provide investment advice, information provided in this document has been prepared without consideration of any specific clients financial situation, particular needs and investment objectives. It is general information only and does not constitute investment or other advice.
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