Energy disruption has moved from tail risk to a central market driver. With commodities providing the most reliable hedge and broader fundamentals still supportive, the focus is on staying flexible - ready to add risk if tensions ease while managing downside if energy shocks persist.
The conflict has entered a more complex phase, with disruption to energy flows emerging as the primary channel through which geopolitical tensions are influencing the global economy. The Strait of Hormuz remains heavily contested, with shipping flows significantly curtailed and insurers withdrawing cover, moving what had previously been considered a tail risk into a more tangible market focus. Oil prices have therefore become increasingly volatile, and a prolonged disruption could push prices materially higher, potentially generating non-linear effects on inflation and growth. While this is not currently our base case, the probability of a more persistent energy shock has increased.
Fidelity’s Global Macro & SAA team sees a central scenario of continued regional confrontation rather than swift resolution, with the Strait likely to remain contested even if selective tanker flows continue. In this environment, we expect oil to trade with a durable geopolitical risk premium, creating a supply-side shock with stagflationary characteristics as inflation pressures rise and growth moderates. Import-dependent regions such as Europe and parts of Asia are likely to face the largest terms-of-trade shock. However, the global economy enters this episode with relatively resilient fundamentals, meaning recession risks remain contained unless oil prices move materially above the $120 per barrel range for a sustained period.
Against this backdrop, markets remain highly sensitive to developments in energy supply and shipping routes in the weeks ahead. Across the Multi Asset team, our overall view is that the conflict is unlikely to evolve into a prolonged multi-month war involving broader regional escalation. Economic and political incentives across the major parties still appear broadly aligned toward de-escalation within weeks rather than months, given the significant costs that sustained disruption would impose on global growth, inflation dynamics and domestic political conditions.
The next two to three weeks are therefore a critical window in determining whether tensions stabilise or escalate further. De-escalation could take several forms. A bilateral stand-down remains the most straightforward outcome, although a unilateral declaration of success by the United States or Israel could also contribute to a cooling of tensions even if some disruption persists in areas such as the Strait of Hormuz. The path to resolution may not be linear, and markets may continue to experience periods of disruption before clearer signs of de-escalation emerge.
Staying nimble on positioning
If tensions ease meaningfully in the coming weeks, markets could experience a risk rally as geopolitical risk premia unwind. We would view such an outcome as an opportunity to add risk rather than reduce exposure, given broadly healthy market fundamentals – assuming the broader macro cycle remains intact. Episodes of geopolitical stress can create temporary positioning distortions, and a resolution could therefore provide cleaner entry points across several markets. Potential beneficiaries include financials with limited exposure to private credit risks, emerging market equities and selected cyclical value exposures, where valuations remain relatively attractive and sensitivity to global activity is higher.
Traditional safe-haven dynamics have been less consistent since the conflict began. While the US dollar has strengthened modestly, defensive currencies have not rallied significantly. Gold, which has previously been an important diversifier in portfolios, has also not provided a particularly strong hedge during this phase of the conflict. Part of this reflects the unwinding of several previously crowded market positions, including long gold, curve steepening trades and short US dollar exposures, which has tempered the typical safe-haven response. However, we continue to see an important role for gold in portfolios and would view periods of weakness as opportunities to add exposure, with the structural investment case remaining intact.
By contrast, energy and broader commodity exposures have been the most effective hedge against escalation risk so far. We have increased allocations to diversified commodity exposures, which we see as a more reliable hedge than concentrated oil positions while also offering medium-term diversification benefits.
Within fixed income, we have been selectively adding shorter-dated high-quality developed market government bonds and emerging market hard currency debt, where the recent rise in yields has created more attractive entry points. At the same time, we remain cautious on longer-dated duration, given uncertainty surrounding the evolution of term premia and the broader inflation outlook.
Against this backdrop, overall portfolio positioning remains constructive but flexible. Across strategies, portfolios retain a risk-on stance, with a moderately reduced overweight to equities, a small underweight to credit, selective government bond exposure, and some dry powder retained in cash to deploy should volatility create more attractive opportunities. In periods like this, we utilise the full flexibility of our toolkit, combining a broad range of instruments while seeking uncorrelated sources of return to help navigate volatility and evolving macro conditions.
Monitoring risks in private credit
Private credit markets remain an area of attention. Recent stresses in alternative lending, largely concentrated in the syndicated loan and high yield markets, have prompted a shift in investor behaviour, particularly among retail investors using open-ended vehicles, as redemptions begin to rise. While direct exposure across the team is limited, we continue to monitor developments around potential gating in parts of the private credit market. Should gating become more widespread, there is potential for spillover into more liquid credit markets, particularly if reduced liquidity begins to influence broader risk sentiment. At present, we see this as a background risk rather than a central scenario.
Navigating uncertainty and fast-moving markets: flexibility is key
Geopolitical shocks can generate significant short-term volatility, but they rarely alter the structural drivers of the market cycle unless they become prolonged or lead to sustained disruption in global economic activity. More broadly, these developments reinforce the longer-term trend toward a more fragmented and multipolar global economy, where energy security, supply chains and geopolitical alignment increasingly shape market outcomes. In such an environment, volatility may remain elevated and traditional diversification relationships less reliable. Dynamic asset allocation and diversified sources of return therefore become even more important in navigating uncertainty while maintaining exposure to longer-term investment opportunities. In periods like this, the ability to draw on a broad investment toolkit, supported by deep research, disciplined portfolio construction and a team-based decision-making process, becomes particularly valuable in balancing responsiveness to changing conditions with the discipline needed to avoid reacting to short-term market noise.