Initial Assessment

Recent events in the Middle East represent a major geopolitical development. While the situation remains highly fluid, our investment teams are actively monitoring market conditions, policy responses, and potential second‑round effects across asset classes. Periods like this underscore how quickly macroeconomic risks can emerge from outside financial markets and why diversified portfolio construction matters alongside tactical views.

In our client discussions we are reinforcing the importance of monitoring developments without making drastic portfolio shifts.

Market Opening and Near‑Term Volatility

On March 2, following geopolitical shocks that occurred over the weekend, markets responded as expected. The initial stock and bond market movements have remained orderly and do not currently indicate market panic. Oil futures initially surged the most in four years with the effective closure of the Strait of Hormuz.

Equity markets have pulled back but remain well within the range of recent selloffs. Bond yields are higher on modest inflation concerns but within normal daily trading ranges. In such environments, performance dispersion typically increases, reinforcing the value of diversified exposure rather than reliance on a single outcome.

Energy: The Central Transmission Channel

Energy remains the key variable for markets and the global economy.

• Strait of Hormuz risk: Roughly 20% of global oil and liquified natural gas (LNG) flows transit the strait. A full physical closure is unlikely, but insurance withdrawals, safety concerns, or intermittent disruptions could materially impair flows even without a formal blockade
• Oil prices: A further near‑term spike is possible if shipping disruptions or infrastructure damage materialize. However, absent sustained supply losses, prices could stabilize as the risk premia fades
• Global impact: Any meaningful disruption (e.g., >1 million barrels/day) would tighten energy markets and weigh on global growth. While today’s economy is less oil‑intensive than in the 1970s, energy shocks remain a proven trigger for inflationary pressure and slower growth, often affecting regions and asset classes unevenly.

Macroeconomic, Rates, and Policy Implications

Higher energy prices would complicate the inflation outlook and could delay global central bank easing. Historically, geopolitical shocks have often led to lower long‑term bond yields as growth risks rise, though outcomes depend on whether inflation or recession fears dominate. A notable watch point is the U.S. dollar: a failure to rally in a risk‑off environment would signal a potential shift away from its traditional safe‑haven role.

Scenarios We Are Monitoring

• Base case: A relatively short‑lived, contained conflict with limited energy infrastructure damage. Under this scenario, the risk premia gradually fades and markets refocus on fundamentals
• Downside risk: Prolonged disruption to oil, LNG, or key shipping lanes; strikes on Gulf energy infrastructure; or escalation that extends the conflict materially. This would raise recession risks and pressure risk assets
• Potential upside: A quicker‑than‑expected de‑escalation, symbolic retaliation, and no sustained impact on energy flows, allowing markets to look through near‑term volatility.

At this stage, we believe the length of disruption in energy supply chains is the biggest variable to watch in terms of market impact.

Portfolio Positioning and Opportunities

Periods like this reinforce the value of diversification and high-quality assets. Importantly, diversification is not about predicting outcomes, but about ensuring portfolios remain resilient across a range of scenarios. Historically, markets have often recovered in the months following geopolitical shocks, and volatility can create opportunities to add exposure selectively once risks are better priced.

Takeaways

This is an evolving situation, with energy markets at the center of potential spillovers to inflation, growth, and financial markets. While near‑term volatility is likely, outcomes will depend primarily on how long disruptions persist and whether energy infrastructure or trade flows are materially affected.

In environments where risks are asymmetric and hard to forecast, well‑diversified portfolios can help manage uncertainty while preserving the ability to act. We are actively assessing risks and opportunities and will keep investors informed as conditions develop.

For more information reach out to your TDAM Representative.

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