Investors’ Outlook: On tenterhooks

On tenterhooks

Investor attention is fixed on the war in Iran. The immediate questions include how far it could escalate, what it could mean for energy supply and inflation, and whether the Strait of Hormuz becomes a longer-term point of disruption.

If the strait reopens, the outlook for decent global economic growth and corporate profits can be maintained. If not, and if energy prices rise and growth slows, the prospect of stagflation¹ becomes a possibility. With so many unknowns, markets are holding their breath while central banks weigh the war’s impact on inflation.

We currently believe that there will be enough of a de-escalation for the strait to reopen even if the conflict isn’t resolved and we maintain a positive macroeconomic outlook. But the current situation highlights a set of emerging risks to that base case. We’re also observing that many companies emphasize their minimal direct exposure to the Middle East, but we find that misses the point. The global economy is interconnected, and one clear example is energy: oil and gas. Even without direct exposure to the region, there is still indirect exposure through energy markets. On top of that, an economic crisis in the Gulf may not necessarily impact global growth, but it could negatively affect capital markets. We believe this second-order effect shouldn’t be underestimated.

Private credit has the potential to become a risk for markets, too. These funds often lend to software and technology-linked companies (so, business models at potential risk of AI disruption), through illiquid, privately negotiated loans whose valuations are less transparent than public debt, which makes it harder to assess true credit quality. What tends to unhinge markets is a sudden withdrawal of liquidity, especially in systems with built-up leverage. Within private credit, there are aspects of debt-on-debt² structures that have the potential to trigger a domino effect, where market participants start experiencing losses because they’re heavily invested in private credit and need to sell their assets. That can become the initial pressure point for broader markets, and it’s not entirely clear whether we haven’t already seen early signs of this dynamic unfolding.

In our view, this only becomes a potential issue if the Strait of Hormuz remains closed for an extended period. Even then, it’s still open to Chinese and Iranian vessels, while being effectively closed from a Western perspective. We provide Multi Asset Boutique clients with separate, detailed updates on the evolving situation in the Middle East as developments warrant.

In this Investors’ Outlook, we take a closer look at Japan’s economy and its prospects under Prime Minister Sanae Takaichi, connect the dots between the war in Iran and what it means for food prices, and explain what central banks are now grappling with.