Executive Summary

  • The Iran war remains the dominant driver of global markets, with energy prices, inflation expectations and central bank policy all heavily influenced by developments in the Middle East.
  • Oil prices remain elevated and highly volatile as markets continue to react to conflicting headlines regarding potential peace negotiations.
  • Investors have become increasingly sceptical of official claims that a resolution is imminent, as disruption to energy markets continues despite repeated diplomatic announcements.
  • Global equities remain resilient but increasingly dependent on policy support rather than underlying economic growth.
  • UK, European and Asian markets continue to offer more attractive valuations than the United States.

 

Iran War: Markets Are Trading Headlines, Not Reality

The Iran conflict continued to dominate financial markets throughout May. While the intensity of military activity fluctuated, the overall picture remained largely unchanged: shipping through the Strait of Hormuz remains heavily disrupted, energy markets remain under pressure, and uncertainty continues to weigh on global growth. Recent estimates suggest that more than 14 million barrels per day of production remain affected by the disruption, making this one of the largest energy shocks in modern history.

What has become increasingly apparent is the growing disconnect between political rhetoric and economic reality. Throughout the month, markets repeatedly rallied on comments from U.S. officials suggesting that peace negotiations were progressing and that a resolution could be close. Oil prices often fell sharply on these announcements, only to recover as little changed on the ground and disruption to energy flows continued. The result has been a market driven as much by headlines as by fundamentals.

The underlying facts remain difficult to ignore. Tanker traffic through Hormuz remains a fraction of pre-war levels, inventories continue to decline, and insurance costs for shipping in the region remain elevated. Even if a formal agreement were reached tomorrow, restoring normal flows could take months rather than weeks.

For investors, the key lesson is that markets often price expectations long before those expectations become reality. The risk is that repeated optimism eventually collides with economic fundamentals.

 

Oil: The New Inflation Risk

Oil remained the primary transmission mechanism through which the war affected the global economy.

Prices have experienced extraordinary swings over recent months, rising sharply when disruption intensified and falling whenever hopes of peace resurfaced. Despite these fluctuations, oil remains significantly above pre-war levels and the supply outlook remains uncertain. Analysts continue to warn that prolonged disruption could keep prices elevated for much of 2026.

Higher energy costs are now feeding into transportation, manufacturing and food prices across much of the world. This is creating a new inflationary pressure at precisely the point where central banks had begun to gain confidence that inflation was under control.

The greatest risk is not necessarily another spike in oil prices, but rather the possibility that prices remain persistently elevated. History suggests that sustained energy inflation is often more damaging to economic growth than short-term price shocks.

 

Global Equities Context

Global equity markets delivered mixed performance during May. Volatility remained elevated as investors attempted to balance weaker economic growth against expectations of lower interest rates.

The United States continued to lag many international markets. Large technology companies struggled to regain momentum, and concerns regarding valuations remain. Investors appear increasingly willing to look beyond the U.S. for opportunities, particularly in regions where valuations remain significantly lower.

Meanwhile, UK and European equities continued to benefit from this rotation. Japan remained supported by corporate reforms and strong investor inflows, while India continued to demonstrate some of the strongest long-term growth characteristics globally.

Overall, global markets remain supported by expectations that central banks will eventually ease policy further. However, the Iran conflict has introduced a new source of uncertainty that markets had not anticipated at the start of the year.

 

Central Banks: Caught Between Growth and Inflation

Central banks face a more complicated backdrop than they did only a few months ago.

Economic growth remains weak across many developed economies, supporting the case for lower interest rates. However, higher energy prices threaten to push inflation higher again, creating a difficult balancing act for policymakers.

In the United States, markets continue to expect rate cuts later this year, although expectations have become less certain as energy-driven inflation risks have increased.

In the UK, the Bank of England maintained its cautious stance. While domestic inflation pressures have moderated, policymakers remain aware that imported energy costs could delay the final stage of the inflation fight.

The path toward lower rates remains intact, but it may prove slower and less predictable than investors had hoped.

 

UK: Better Market Than Economy

The UK economy continues to show limited growth. Consumer confidence remains subdued, business investment is weak and labour market conditions continue to soften gradually.

However, the UK stock market continues to tell a very different story.

The FTSE 100 remains dominated by global businesses rather than domestic ones. Energy producers, mining companies, pharmaceutical firms and multinational consumer brands derive much of their revenue overseas. As a result, the fortunes of the UK stock market are often more closely linked to global economic conditions than to the health of the domestic economy.

Combined with attractive valuations relative to U.S. equities, this continues to support the investment case for UK shares despite a challenging economic backdrop.

 

Other Viewpoints

Cash

Cash continues to offer attractive returns, although the outlook remains uncertain. If inflation remains elevated due to higher energy prices, interest rates may stay higher for longer than markets currently expect.

Fixed Interest

Bond markets remained volatile during May as investors reassessed the outlook for inflation and interest rates. While bonds continue to offer attractive income, expectations for rapid rate cuts have moderated somewhat.

We remain constructive on fixed interest investments, particularly as yields remain significantly more attractive than they were for much of the previous decade.

Alternatives

Gold continued to perform well during May, benefiting from geopolitical uncertainty and concerns about inflation. Commodities also remained well supported by ongoing disruption to energy markets.

Alternative assets continue to provide useful diversification at a time when both economic and geopolitical risks remain elevated.

 UK Shares

UK equities continued to perform well relative to many international markets. Attractive valuations and strong exposure to energy, mining and financial services remain supportive.

US Shares

U.S. equities continue to face headwinds from elevated valuations, slowing earnings growth and increasing concentration risk. While the long-term innovation story remains intact, investors are becoming more selective about where they allocate capital within the U.S. market.

European Shares

European equities remain attractively valued and continue to benefit from improving investor sentiment. However, the region remains vulnerable to prolonged energy disruption given its reliance on imported energy.

Asian Shares

Japan and India continue to stand out as some of the most attractive long-term opportunities globally. China remains mixed, with policy support helping offset ongoing structural challenges.

Emerging Markets

Emerging markets delivered mixed results. Commodity exporters generally benefited from higher energy prices, while energy-importing nations faced increased economic pressure.

 

Highlights & Risks

Highlights:

  • Diversified portfolios continue to demonstrate resilience during periods of geopolitical uncertainty.
  • UK, European and Asian equities remain attractively valued relative to the U.S.
  • Energy and commodity exposure has provided valuable portfolio support.
  • Fixed income continues to offer attractive income opportunities.

 

Risks: 

  • The Iran conflict could continue for longer than markets currently expect.
  • Elevated oil prices may slow global growth and reignite inflation pressures.
  • Central banks may be forced to delay interest-rate cuts.
  • U.S. equity valuations and market concentration remain elevated.
  • Markets remain vulnerable to sudden shifts in geopolitical headlines.