The outbreak of war between the US and Iran has driven moves over recent months. Financial markets have followed the well-worn path seen with prior geopolitical shocks – a risk-off period followed by a strong recovery, despite the ‘problem’ being unresolved.
The current economic ‘problem’ is a substantial one, given the proportion of global commodity supplies – particularly oil and gas – halted by the closure of the Strait of Hormuz. As such we have seen a significant increase in the oil price. While the conflict is currently on ‘hold’, talks targeting a more permanent settlement are slow moving. The protracted nature of dialogue raises risks around more persistent disruption to commodities supplies. We could well see real supply constraints in addition to elevated prices.
The conflict means that the positive global growth outlook has been called into question, but while we have seen growth forecasts downgraded, the disruption is not yet seen as posing risks of recession. Hostilities began with global growth on an improving trajectory thanks to substantial amounts of stimulus across several major economies – that impetus may no longer accelerate growth, but it should
soften the impact of higher energy prices. Parallels have been drawn with the energy shock of 2022 when Russia invaded Ukraine, but that came at a time of historically low interest rates, tight labour markets and inflationary pressures already emerging in the aftermath of the pandemic. This time around, interest rates are normalised, deflationary pressures dominate and labour markets are much looser. Inflation remains a risk, but central banks appear willing to ‘wait and see’ rather than rushing to hike rates, potentially causing unnecessary harm.
The rebound and resilience of financial markets has been encouraging and suggests that many of the themes that led us to a positive view for 2026 remain intact, not least the outlook for corporate earnings, which continues to improve with companies reporting strong growth. Future guidance remains upbeat despite Middle East turmoil. Our positioning through the conflict has remained positive, based on our view that the economic damage would be limited given a likely swift resolution. We remain overweight equities but have pared the emphasis back slightly given the rapid rebound in markets. A more recent tempering of our pro risk stance reflects growing concern that the conflict may endure for longer than feared, thus having a more pronounced impact on fundamentals than is currently being priced.
At a glance – equities and fixed income
Equities
We remain positive on equities and, despite geopolitical uncertainties, we expect strong earnings growth to drive equity returns further. The resilience shown by markets over the past two months highlights that markets are focused on fundamentals, which remain attractive, and are ignoring geopolitical ‘noise’. Valuations are still somewhat elevated in some markets, but given the upgrades to earnings forecasts they appear less stretched than at the turn of the year. We are happy to express our constructive views overall via equities but equally recognise that the rebound, in some cases to all-time highs, has been rapid and much of the good news is priced in. While geopolitical uncertainties remain a potential risk we have reduced our positive stance to ‘mildly favour’ from favour.
Fixed income
We retain a neutral view on bonds. Government bonds continue to show volatility; in recent months we have seen worries over inflation because of the Middle East war weighing on bonds, followed by a recovery as fears over inflation shifted to concerns over growth. Longer-term challenges around debt and fiscal deficits remain, and as the moves seen in UK gilts suggest, risks to political stability with a change of leadership linger. Monetary policy is now more uncertain with the backdrop moving from expectations of loosening as inflation eased to a more clouded backdrop. Markets are pricing in interest rate increases even though central banks have suggested they are waiting for more clarity around the Middle East conflict before shifting policy. Valuations in investment grade and high yield bonds are not overly compelling, and emerging market bonds offer historically low spreads.
Recent asset class changes and views
Our regional equity views remain unchanged with a continued preference for Japan, Asia and the emerging markets. We see strong earnings growth here, with Japan also seeing fiscal stimulus under the new government. Valuation levels make these regions more compelling than the US, which remains at neutral. We have also maintained our neutral stance on the UK and Europe – areas that appeared more interesting earlier in the year but look less able to absorb the impact of higher energy prices compared to other countries and regions.
Commodities have been reduced to neutral following strong performance since the start of the year. While prices may stay elevated in the near term, on the basis that we have seen the worst of the energy shock resulting from the Middle East conflict we have chosen to lock in gains.
As ever with fluid situations driven by geopolitics, our positioning both at the asset class level and overall remains under constant review.
Asset Allocation Matrix
Indicator guide
Use one of the following per cell:
- o = coloured circle
- u = up arrow
- d = down arrow
- ou = coloured circle with up arrow
- od = coloured circle with down arrow
Use only the supported characters above to ensure the table displays correctly.
| STRONGLY DISLIKE | DISLIKE | MILDLY DISLIKE | NEUTRAL | MILDLY POSITIVE | POSITIVE | STRONGLY POSITIVE | ||
|---|---|---|---|---|---|---|---|---|
| Asset Allocation | Equity | od | ||||||
| Rates | o | |||||||
| Credit | o | |||||||
| Property | od | |||||||
| Commodities | o | |||||||
| Gold | o | |||||||
| Cash | ou | |||||||
| Equity Regions | US | od | ||||||
| Europe ex UK | o | |||||||
| UK | o | |||||||
| Japan | o | |||||||
| APAC ex Japan | o | |||||||
| EM | o | |||||||
| Equity Styles | Growth | o | ||||||
| Value | o | |||||||
| Quality | o | |||||||
| Small Caps | o | |||||||
| Fixed Income (*=Spreads) | Nominal | o | ||||||
| Real Rates | o | |||||||
| EM Local | o | |||||||
| IG* | od | |||||||
| HY* | ou | |||||||
| EM Hard* | o | |||||||
| Currency | USD | o | ||||||
| EUR | o | |||||||
| GBP | o | |||||||
| JPY | o | |||||||
| EM FX | o | |||||||
| Return to Risk | PRR | o |
Source: Columbia Threadneedle Investments, as at 20 January 2026. Change from last month
