War and peace: portfolio ramifications

APRIL marks the first anniversary of “Liberation Day”, when US President Donald Trump threatened to levy punitive tariffs on countries around the world.

However, the oil price shock since the start of the Middle East conflict has exacted more pain in terms of inflation, economic activity and capital flows than the year-long tariff war.

The closure of the Strait of Hormuz has tightened the noose around global oil supplies and trade routes. With Trump’s announcement of a naval blockade following failed negotiations between the United States and Iran last weekend, the economic impact of this critical chokepoint for global energy and trade will persist.

Higher oil prices are an exogenous shock that transmits directly through energy prices and business costs into inflationary expectations, growth and monetary policy outcomes.

Countries, industries and companies with demonstrable built-in shock absorbers such as diversified energy sources and supply chain resilience will fare better in periods of energy stress. However, second-order impacts on corporate and individual economic decisions can lead to demand destruction.

Oscillating between heightened military tensions and hopes of de-escalation in the Middle East, the price of Brent crude has spiked from US$61 per barrel at the start of 2026 to peaks of US$120 a barrel. This has driven equity prices lower, bond yields higher and propelled the US dollar, until news of a two-week ceasefire from Apr 8 reversed this trend and provided a short-lived respite.

The variability of outcomes around the reopening of the strait will continue to weigh on decision makers globally – among central banks, companies and individuals.

At Bank of Singapore, we believe it is critical for investors to maintain a strategic focus on building resilient portfolios to ensure long-term outcomes, rather than being whipsawed by volatile market conditions. This involves calibrating portfolio allocations for diversified economic exposures, building portfolio hedges and managing risks actively.

US-Iran developments and economic data serve as valid market indicators but should not be used to instruct strategic entry and exit into markets.

Instead, a structured and deliberate investment process with a strategic asset allocation strategy anchored on core principles of diversification, prudent risk management and calibrated risks provide a solid foundation on which to adjust to market developments.

As we head into the second quarter, several key themes will shape markets:

1. A rupturing world order

The US-led world order of free markets, free trade and globalisation that prevailed since the end of the Cold War is fast cascading into one of power rivalry, regional wars, steep trade barriers and populist policies.

Middle powers in the Americas, Europe, the Middle East, Africa and Asia will increase spending on defence, semiconductors, artificial intelligence (AI), energy supplies and critical minerals, reshape supply chains to increase resilience and repair frayed relations.

2. Portfolio resilience reinforced

In a more complex investment phase with heightened geopolitical inflationary and growth risks, maintaining diversified sources of returns across asset classes will be key for managing both cyclical and geopolitical risks.

It is premature to call an end to the long-term equity bull market that began in 2022 as the global economy is less vulnerable to oil price shocks compared to the 1970s. The impact of the Middle East conflict will be a key focus in the the first quarter 2026 earning season.

As part of a whole-portfolio approach, investors retain core investment exposures, complemented by hedges to reduce portfolio volatility. Investments with a lower correlation to overall markets can limit severe drawdowns to enhance risk-adjusted returns over the longer term.

Based on our historical analysis of oil price shocks, potential candidates for portfolio hedges within diversified global portfolios include high-quality fixed income, large-cap stocks from defensive sectors, diversified currency exposures, as well as real assets.

Despite recent volatility, we see gold as an effective hedge against inflation, fiscal sustainability concerns and geopolitical risks.

Depending on investor suitability and risk appetite, derivatives and structured product strategies can buffer short-term downside volatility in portfolios, or redesign portfolio outcomes to benefit from elevated volatility of selected assets.

A diversified alternatives portfolio of differentiated hedge funds and private markets strategies could improve the overall risk profile of portfolio returns for long-term investors with lower short-term liquidity needs.

3. Recalibrating preferences in Asia

Asia’s economic transformation is set to contribute 60 per cent of global growth by 2030. The relentless pursuit for leadership in technology and sustainability amid geo-economic fragmentation, environmental changes and demographics shifts provide ample opportunities for long-term investors.

Our decision to overweight Asia ex-Japan since 2024 reflects this confidence. Our calibration of the Asia ex-Japan equity overweight allocation to neutral for balanced portfolios last month reflects caution over the impact of high energy prices on Asian oil-importing economies.

This does not detract from our long-term focus on Asia’s economic prowess with the following key drivers:

• China’s domestic innovation engine continues to accelerate, supported by strong state-led investments in advanced manufacturing, renewable energy, semiconductors and AI. Hong Kong, meanwhile, is strengthening its role as a gateway for global capital into mainland China and the broader region.
• Various Asian countries are undertaking value-up programmes to enhance their stock markets, while emerging sectors such as green finance, wealth management and digital assets are also attracting investment flows.
• Asia is also taking up the mantle of sustainability leadership, particularly as other regions waver in their commitments.

Within Asia ex-Japan equities, we retain a preference for Hong Kong, China and Singapore markets for exposure to quality yields and low-beta stocks as near-term defensive plays, while focusing on medium-to- long-term structural themes, such as AI proxies and policy beneficiaries in technology innovation and domestic consumption.

Singapore’s more flexible fiscal position blunts the impact of higher oil prices compared to many of its Asian peers. The government’s roll-out of the Equity Market Development Programme should drive greater liquidity and unlocking of value among Singapore equities.

4. AI disruptors and the disrupted

AI is simultaneously creating disruptors and disrupted companies. Advances in large language model capabilities have shifted market sentiment from AI boosting productivity to concerns around business disruption for selected sectors, including software and non-tech sectors such as insurance brokers and real estate services.

While near-term market momentum remains unfavourable for AI-vulnerable sectors, opportunities arise for patient investors in companies with defensible moats in the AI era.

Regardless of AI application leadership, compute demand and semiconductors will be set for outsized growth built on hyperscalers’ ambitious capital expenditure plans.

Overall, we emphasise the importance of focusing on structural themes and long-term strategic thinking in building portfolios for wealth investors. In the epic novel War and Peace, Leo Tolstoy wrote: “The strongest of all warriors are these two – time and patience.”

The ongoing wars and oil supply shocks are exogenous market disruptions that exert pressure on inflation, growth and economic policy to create impact that may be non-linear and unpredictable.

An enduring strategy focused on exposure to long-term economic drivers, effective diversification and building portfolio resilience will help investors stand the test of war and peace.

The writer is global chief investment officer, Bank of Singapore