Over the past month, stock and bond markets have been driven by diverging forces. Bond yields have risen at the short end due to inflation pressures and more hawkish central banks, while long-end yields have climbed on higher term premiums amid Middle East uncertainty and ongoing high fiscal deficits.
Equities, however, have been less affected by the war. Markets rebounded from their March lows, although the rally has been largely driven by a few themes (energy, hyperscalers, memory chips), a handful of artificial intelligence-linked (AI) names and the prospect of productivity gains, which we think will only happen over the long term.
To us, the diverging narratives between bonds and equities signal the difficulty of assessing the impact of disruption to traffic flow through the Strait of Hormuz. In addition, it highlights the uncertainty around second-round economic effects – the transmission of the crisis from energy and logistics to inflation, growth, corporate margins and business and consumer confidence.
- Our base case has shifted from a benign slowdown to a managed disruption to the economy, with lower growth expectations for major economies for 2026 and continued regional divergences.
- Europe and energy–importing emerging markets (EM) are more exposed. In the Eurozone (EZ), we cannot exclude the possibility of stagnation in some countries this year, and we also see risks of slowing growth in parts of South Asia. The US is relatively insulated but still vulnerable through financial and confidence channels. Capital expenditure should provide strong support to growth, mainly in tech-related areas (but not entirely), and tax cuts also provide business with a slight buffer against geopolitical risks.
You can now read the full whitepaper at the link below
