13 Apr 2026
Global markets are adjusting to disruption at key trade choke points as volatility remains elevated. With risks skewed to further escalation, senior members of our investment team assess the implications for growth and inflation and highlight the benefits of diversification, selectivity and flexibility in an uncertain environment.
Current geopolitical developments represent a significant macro shock centred on the disruption of key global trade choke points, most notably the Strait of Hormuz. The focus on choke points has been building over time, beginning with the pandemic and alongside the emergence of US-China strategic rivalry.
The disruption to the Strait of Hormuz has been material. Traffic has declined sharply from normal levels, although some flows continue. The impact extends beyond crude oil to other areas such as fertiliser and broader supply chains. Further escalation could bring additional choke points into focus, particularly the Bab el-Mandeb in the Red Sea, which would affect east-west trade flows.
Regionally, the impact is most acute in emerging Asia. China, for example, remains highly dependent on energy flows through the Strait, with around half of its energy demand passing through it. Europe faces secondary exposure through gas, while the US remains relatively insulated. Indeed, only around 3% of US energy demand is linked to the Strait and it is now a net energy exporter following the shale expansion. This divergence is an important macro differentiator.
Markets are currently pricing a partial disruption. Oil is trading in a US$90-110-dollar range, reflecting an estimated 10% impact on global supply. Some offset is provided by alternative routes and production from Saudi Arabia and the UAE, although flows through the Strait remain constrained. At current oil levels, the macro impact is manageable but a move above US$120 would begin to have more significant implications for both growth and inflation.
At current oil levels, the inflation shock is manageable. The current view of oil prices provides scope for central banks to adopt a wait and see approach rather than move towards tightening. However, if the disruption persists or escalates, inflationary pressures would increase and begin to weigh on growth through demand destruction, creating a more difficult trade-off for policymakers.
This differs from 2022. Monetary and fiscal conditions are already restrictive, reducing the risk of a self-reinforcing inflation dynamic and allowing policymakers more time before needing to act.
Equity markets have overall been relatively resilient despite heightened geopolitical risk, with global indices declining around 3% - 4%. The US has been more resilient in the recent sell-off, while Europe, Japan and emerging markets have seen larger declines. However, on a year-to-date basis, the US has lagged, with some regions still delivering positive returns.
Volatility has increased, reflecting uncertainty around the outlook. Markets are balancing two potential outcomes. The first is a short-lived disruption. The second is a more persistent energy shock that could lead to stagflation, which would be a negative backdrop for equities.
The base case for equities remains positive, supported by earnings growth and valuations. At the same time, there is a need to monitor developments closely and reassess if conditions change.
Inflation expectations were seen as too low entering the year, and portfolios were positioned with short-dated inflation protection, which has performed well. Markets have repriced quickly, with yields moving higher and curves flattening.
Short-dated inflation hedges are being maintained. At the same time, outright duration positions are considered very challenging given the level of volatility and uncertainty. Directional views, including on duration and curve shape, are difficult to express with conviction. As a result, the focus is on remaining agile and selective in positioning.
This includes adjusting currency exposures, particularly around the US dollar where short positions have been reduced given a more constructive near-term stance. That said, we still maintain a longer-term expectation of dollar weakness.
Elsewhere, credit spreads have widened modestly but moves remain contained and well below previous stress episodes, with no signs of disorderly selling at this stage. Credit markets have so far absorbed increased supply, particularly in US investment grade linked to AI related issuance. However, some early question marks are emerging, particularly in private credit, where liquidity constraints could create potential spillover effects.
From a multi asset perspective, we entered this period constructive on risk assets with a notable overweight in emerging markets, supported by easing monetary policy, increased fiscal spending across major economies and strong private sector balance sheets.
In recent weeks, markets have repriced with bond yields rising and the US dollar strengthening, which has created headwinds for emerging markets. However, performance has been differentiated, reinforcing the importance of country level analysis.
China has been relatively resilient, supported by diversified energy inputs, significant inventory buffers and stronger than expected domestic data, including retail sales. Elsewhere, Korea continues to benefit from its position within the AI driven capex cycle, while Brazil is supported by declining inflation and the prospect of monetary easing.
Emerging markets should be viewed as a sum of the parts, with performance driven by individual country dynamics. While near-term volatility remains, underlying fundamentals in several markets continue to provide support.
Against this backdrop, our positioning has been adjusted selectively. While allocations to emerging market equities have generally been maintained, exposure to local currency debt and FX has been reduced where the risk return profile has become less attractive,
Portfolio construction has also evolved as bonds have become less reliable as a diversifier in recent years. As a result, there is a greater emphasis on alternative sources of diversification, particularly real assets such as gold and selected commodities, supported by structural demand from energy infrastructure, defence and the energy transition.
While market attention is currently focused on geopolitical developments, the progression of artificial intelligence has not slowed. The development of AI has progressed in distinct phases, moving from mainstream adoption in 2023 to enterprise integration in 2024 and broader accessibility in 2025. 2026 is now shaping up as the year of AI agents capable of end-to-end task execution.
Based on our most recent Analyst Survey, demand across the AI ecosystem remains strong, including across hardware, infrastructure and energy. At the same time, markets are increasingly differentiating between winners and losers, and not all companies will benefit equally.
The broader economic impact also warrants close monitoring, particularly in relation to the balance between productivity gains and labour markets dynamics.
Markets have remained relatively resilient despite elevated geopolitical risks. At current levels, the macro impact is considered manageable, although a more sustained or escalatory shock would materially affect the outlook. Across asset classes, we continue to maintain a consistent focus on diversification, selectivity and adapting positioning in response to evolving conditions.