In­vest­ment Traf­fic Lights

1.1 Another month under the spell of uncertainty

Remember Venezuela? That was January. Remember Greenland? That was February. And Iran? We fear the conflict will not be confined to March – though this had been the original expectation of U.S. military strategists and some optimistic investors. By now it seems clear that Iran will continue to preoccupy the markets in April, too.

In March, markets reacted with alarm to the joint attack by the U.S. and Israel. Mixed messages about the aims of the war added to the fear and uncertainty. The markets’ hope was that the so-called TACO trade would soon apply: In other words, the U.S. President might reverse course, under pressure from the markets. By the end of March, he still had not done so, though he keeps on sending some signals that he might be about to. But can he?

As stated above, the war has not gone according to plan. The Iranians have shown that by closing the Strait of Hormuz they can exert maximum pressure on the U.S. via higher oil prices. And it requires just a few attacks on ships by drones or other weapons per day to close the Strait as this ensures that ships cannot obtain insurance cover for their passage. A further factor which has delayed an end to the war is that Iranians have no reason to rely on negotiations with Washington, having been attacked by the U.S. in the middle of the previous two rounds of negotiations, in June 2025 and February 2026. And the U.S. President keeps on sending mixed signals. At present we don’t think anyone can be sure how the crisis will end. Nonetheless, very positive market reactions on the last day of March to further brief remarks from Trump show how eagerly investors are waiting for positive news. Some asset classes were able to reduce some of their hefty losses from March thanks to this last trading day.  

The confusion is reflected in the erratic market movements in March. The Brent crude oil price surged quite early to record highs of almost USD 120 per barrel intraday before embarking on a zigzag course. Equity markets took time to drift lower but approaching the end of March some were in correction territory, down more than 10% from their previous peaks. Rising nervousness is evident in the VIX (which measures the implied volatility of the S&P 500), which climbed from 15 in mid-December 2025 to a peak above 30 during the course of March. At the same time, gold proved to be a poor stabilizer as the precious metal fell by more than 10%.

Bonds were also losers as yields rose in lockstep with inflation concerns. The yield on German 10-year government bonds rose to more than 3% for the first time since 2011. Toward the end of the month, however, when growth concerns outweighed inflation concerns, yields fell slightly again. The dollar’s trajectory was also interesting. In the event of a geopolitical shock of this magnitude, one would normally have expected a significantly stronger dollar. Yet it has risen by only 2% against a basket of currencies.

1.2 Product shortages – from a price problem to a volume problem

That within the equity sectors only the Energy sector ended in positive territory should come as no surprise. That the U.S. technology aristocracy, the Magnificent 7, once again underperformed the S&P 500 perhaps does. Concerns about AI-driven disruptions, the painful increase in bond yields for sector valuations and the war came together. Supply chain disruptions could start to weigh on the IT sector.

The Gulf has long since ceased to be merely an oil exporter. Alongside liquefied natural gas (LNG), fertilizers and various petrochemical intermediates, helium has also recently made headlines, as it joins those goods in which the Gulf accounts for a substantial share of global trade – in this case around 30%. Helium is required, among other things, for semiconductor production. While the major Asian manufacturers emphasize that their inventories are sufficient for several months, production cutbacks from second- and third-tier manufacturers are likely as early as April if helium supplies no longer arrive.

The travel sector is very vulnerable, too. Since the beginning of the year, kerosene, used by aircraft, has more than doubled in price. Some airlines have already reduced the number of flights they offer.

The main driver for markets in March (and probably for April as well) can be summed up in one sentence: It all depends on how long the Strait of Hormuz is closed. Even an immediate opening could not undo the damage already done to supply chains, which we expect to become visible in coming weeks and months, but we have little doubt it would relieve the markets. As there is at least a theoretical chance that the Strait might open in April, however, investors may want to position themselves in such a way as to participate in any potential relief rally. At the same time, there doesn’t seem to be an easy way out of the conflict and the goals of the three parties involved differ. Iran’s use of the Strait of Hormuz as a stranglehold on the global economy gives it a huge level of leverage. In addition, having been attacked twice in the midst of negotiations, its willingness to trust the U.S. and Israel seems to be low. Israel appears to be focused on inflicting maximum damage to Iran’s ability to function as a state.

While the U.S. remains the most militarily powerful of the three parties involved, what it initially anticipated as a straight-forward 4-week operation has unfolded quite differently. Instead, the U.S. now finds itself entangled in the complexities and challenges of an asymmetric conflict, far from its original expectations. At present, the U.S. is sending very mixed signals, from “constructive talks, leading to mutual control and management of the Strait” to threats to destroy civilian infrastructure in Iran, ^[1]which could constitute a war crime.

2.1 Fixed Income

For the markets and central banks an overarching question arises from the Iran war: Is inflation or a growth slowdown the bigger threat? Or could we end up having both? We still believe that central banks will tend to look through the inflation hike caused by higher energy prices, especially as there are some differences to 2022, when inflation was caused not only by a supply shortage as a result of the Ukraine war but also a post-Covid surge in demand. For corporate bonds, we believe that current spreads have more potential for widening than tightening.

Government Bonds

We made a couple of tactical changes in March. Starting with the U.S., we upgraded 2-year Treasuries from +1 to +2 and went from Neutral to +1 in 10-year Treasuries. We believe the market is right to be concerned about an inflationary shock, but it’s ignoring the negative growth/consumption effects of higher oil prices. Apart from that, U.S. labor markets have not looked strong in recent months. Just as with 10-year Bunds and UK Gilts, both of which we upgraded from Neutral to +1, these are positions we are monitoring on a daily basis. Any signs of persistent upticks in inflation expectations would bring these calls into question. We also upgraded Japanese government bonds (JGBs) from Neutral to +1. While the Bank of Japan has been on a tightening path, we believe it will revert to inactivity in troubled times. After the rapid increase in JGBs’ 10-year yields in March, we expect consolidation.

Corporate Bonds

Increased geopolitical risks have, we believe, not really found their way into all corporate credit spreads, especially in the investment-grade (IG) segment, where spreads are close to historic lows. We now have a neutral view on both IG and high yield (HY) in the US and Europe after we downgraded EUR IG. When we changed our call to +1 on EUR IG Credit earlier this year, the base case assumption was solid economic growth, a subdued inflation outlook, supportive monetary policy and a low risk of recession. In combination with an ultra-strong technical backdrop on the back of continuous good demand for the asset class, low dealer inventories and ample cash on the sidelines, this supported our view that the market is on its way to new credit spread lows in the post global financial crisis era. But the U.S. attack on Iran has challenged these assumptions.

Emerging Markets

As a result of increased uncertainty and our expectation of a risk-off mood in markets, we downgraded emerging-market (EM) sovereigns to Neutral at the beginning of March.

Currencies

After the first, typical reaction to the Iran war on the currency markets -- strengthening of the U.S. dollar in a general risk-off environment – we have become more positive on the euro again. A certain degree of dollar fatigue is evident in the markets in our view. Though the Iran war has dragged on and the risk of further escalations has increased, the dollar has ceased to profit anymore. We therefore upgraded the euro to +1 vs. the dollar.

2.2 Equities

As a couple of bigger equity indices have entered correction mode, the upcoming reporting season will be scrutinized by investors, looking for adverse repercussions from the war. 1Q26 results, which we believe should be decent, could give investors some confidence, not least because sell-side analysts have so far been reluctant to make deeper cuts in their 2026 earnings-per-share (EPS) forecasts. But with each day that the Strait of Hormuz remains closed, the risks of supply chain disruptions keep rising.

Now there is the possibility that sentiment could move fast in one direction or the other. We therefore remain broadly diversified across regions and sectors. We remain positive on Healthcare, given its defensive qualities, and upgraded the Energy sector at the beginning of March. Markets had been quite reluctant to price in much upside in energy company’s potential earnings, which suggested upside if oil and natural gas prices remained higher, which they did. This should help the energy sector to continue outperforming, especially since many companies have low leverage ratios and are focusing on boosting shareholder returns. Distributions (both dividends and buybacks) in the mid-to-high-single-digit area are priced in at Brent prices of $65/barrel vs. a spot price close to $100.

While we consider it important to stay resilient through broad diversification, we are also on the lookout for potential beneficiaries in the post-war world. Alternative and nuclear energy, construction and engineering companies and the next generation of defense companies may be among them, with a focus on Asia and Europe. Furthermore, battered sectors such as the real estate sector in the U.S. and UK (suffering from higher interest yields) might profit from a de-escalation.

We have a balanced short-term outlook for the S&P 500. Should the index approach 6,300 points, without much further deterioration in the economic and political fundamentals, we might consider changing our view from neutral/balanced to “up” on our tactical S&P 500 Next 5%+ price signal. However, while 6,300 or 21 times what we consider a protected S&P 2026 EPS estimate of $300 (expected 2026E EPS remains $310) is reasonable, we are concerned by the climb in 10-year Treasury and 10-year TIPS yields as the equity market flirts with correction. We retain a neutral/balanced signal at this time but consider changing our stance on U.S. Tech and Financials now and more broadly in the market if the S&P 500 nears 6,000. We remain concerned about potential further downside in U.S. small caps and industries that are sensitive to rising or high Treasury yields.

2.3 Alternatives

Gold

Gold has not really worked as a safe-haven^[2] hedge  in March. And we might see some EM central banks having to sell gold in an effort to protect their currency, as Turkey did. On the other hand, the longer-term urge of many central banks to replace the dollar with gold in their vaults is likely to persist in our view. Consequently, we view the recent sell-off as providing a medium-term attractive entry level and continue to prefer gold to silver.

Oil

We expect the oil price to remain elevated as the Iran conflict remains active. A prolonged blockage of the Strait of Hormuz could lead to Gulf producers running out of spare storage while waiting for the Strait to reopen. This would exacerbate the problem of already restricted supply as a result of the conflict. Our medium-term supply/demand outlook is relatively bearish. Should the parties achieve a negotiated outcome, and Gulf states resume planned supply, we may see a quick reversion of the oil price back to its pre-conflict levels. The U.S. has stated its strong interest in sharing in the selling of Iranian oil after the conflict. We expect the conflict risk premium to be priced out very quickly, moving Brent back to $60/barrel. However, so far we see little indication that the conflict is about to end.