This decade alone has seen the global economy and markets put to the test several times: the pandemic, the war in Ukraine, rising inflation, US trade policy, and now the war in the Middle East. Added to this are the disruptive effects of artificial intelligence.
So far, the shock waves have not been strong enough to overturn the overall favorable environment on the stock markets. The question is: Can the markets withstand the stress test of an energy price shock?
Energy prices have risen sharply
The price of oil has now risen to over USD 100 per barrel and the price of liquid gas has also risen to more than USD 60. Adjusted for inflation, the oil price is still relatively low, but the price trend can now be regarded as a shock. This refers to a sharp price change within a short period of time. After all, the price of crude oil was still around USD 60 per barrel at the start of 2026. The price of liquid gas was around 27 US dollars.
Even though significantly less energy is now required to produce one unit of gross domestic product – oil intensity is much lower than in the 1970s – the global economy remains dependent on the transportation of crude oil and liquefied natural gas through the Strait of Hormuz. After all, over 20 % of the global transportation of crude oil and natural gas takes place in this strait. Furthermore, although the Middle East’s share of global crude oil production has fallen, it still accounts for around 30%. Its share of global natural gas production is significantly lower, but still high at 17%.
The vulnerability of the global economy in the medium term becomes clear when you take a look at the confirmed reserves: the region is home to around 55% of the world’s crude oil reserves and has around 40% of global natural gas reserves. An expanding war is now taking place in this area. It is therefore not surprising that the markets are reacting nervously.
Is the growth scenario in danger of tipping over?
The war in the Middle East remains the decisive factor for the markets. The question is whether the stagflationary shock (higher energy prices reduce purchasing power) is big enough to overturn the currently valid and actually favorable basic scenario of “inflationary growth”. Economists understand this scenario to mean economic growth that is at or above trend and inflation that is around or slightly above the target value of around 2%.
According to the textbook, this is positive for risky assets such as equities. However, a stagflationary impulse affects equities and bonds at the same time. This is because the value of coupons falls when inflation rises and companies’ profit margins fall when the economy weakens.
The greatest uncertainty relates to the extent and duration of the energy price wave. In addition, the uncertainty itself could dampen the mood in the economy and on the markets. How big can the price wave become? That depends largely on the duration of the war. However, as the strategic war aims of the USA leave room for interpretation, both the duration and the intensity of the shock wave are uncertain.
In any case, regime change is likely to be a key element of the war aims. If successful, this would lead to lower energy prices and probably also to an economic boom in the region. If the existing political structure remains in power, the prospects are less clear. As the power structure in Iran has so far shown no signs of relenting – Mojtaba Khamenei has been appointed to succeed his father as Iran’s supreme leader – energy prices have continued to rise. As a result, share and bond prices also came under pressure at the start of the week.
How does portfolio management react?
In the current environment, safe-haven instruments and commodities are becoming more attractive. For this reason, we have taken appropriate measures:
- Increasing the eurozone’s money market share – a classic risk reduction measure.
- Lower currency hedging against fluctuations in the US dollar in some portfolios. The US dollar tends to strengthen in phases of increased exchange rate fluctuations.
- Increase in the proportion of raw materials – the longer and more intense the energy price shock lasts, the more favorable it is for raw materials.
- At the same time, the proportion of government bonds in the eurozone is being reduced. The prospect of an increase in inflation is negative.
- The equity component will remain defensively neutral for the time being.
The current situation calls for active management. It is important to remain calm and distinguish the trend from fluctuations.
Note: An investment in securities involves risks as well as opportunities.
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