Counting the cost of war

Conflict in the Middle East has put energy prices back at the centre of markets. Portfolio manager BRIAN ARCESE writes that higher oil prices do more than unsettle inflation forecasts: they complicate central bank policy, squeeze household spending and leave investors facing the awkward mix of weaker growth and sticky prices.

Geopolitical risk returned with a bang in 2026. The war on Iran has done what Middle Eastern wars so often do: it has pushed energy back to the centre of the investment picture. The region remains critical to global oil supply, so when shipping routes are disrupted and supply is less secure, crude prices rise and volatility spikes. This matters well beyond commodity markets. Dearer energy costs feed into transport, production and, before long, the general cost of living.

The oil shock has come at an inconvenient moment for policymakers. Global inflation had been easing from earlier peaks, but it had not disappeared. Central bankers were hoping for a gentler path forward from here; higher oil prices now make that harder, adding fresh price pressure just as growth is starting to lose momentum. Fears of stagflation — stagnant growth, job losses and rising prices — are perhaps overblown for now.

For share markets, the problem is not only that costs rise and profit margins come under pressure. It is also that households have less left over once they have paid for fuel, transport and electricity. That tends to show up quickly at the tills. Companies are squeezed from both sides: input costs rise just as sales growth weakens. Richly valued parts of the market — especially US share markets, where share prices remain close to record highs — leave little room for earnings disappointment in that sort of environment.

Bond markets have not offered their usual refuge for uneasy equity investors. Slower growth would ordinarily support bonds, but higher inflation can keep bond yields higher — and bond prices lower — than investors had hoped. The classic 60:40 portfolio (60% equity, 40% bonds) looks a little less dependable than usual if both asset classes fall in tandem. 

That is why dynamic asset allocation and diversification matter more during periods like this. Not all markets are equally exposed, and not all valuations start from the same place. Parts of Asia, including China, still trade on more modest ratings than many developed markets, despite their own worries. When the outlook is clouded, price matters more, not less.

Including non-correlated investments into portfolios remains sensible. For instance, gold can still earn its keep when geopolitical stress, currency nerves and inflation worries arrive together. Liquidity matters, too. Cash may be unexciting, but it gives investors room to manoeuvre when markets dislocate and better opportunities appear.

Building resilient portfolios does not depend on predicting the path of the war. The more useful lesson is simpler. War raises the price of energy. Dearer energy prices drive up inflation, weigh on growth and make life harder for consumers, companies and central banks alike. For investors, the sensible response is much the same as ever: stay patient, stay selective and do not pay too much for optimism.