Conflict in the Middle East has created real uncertainty for investors. While it is clear that higher oil prices will have an impact on inflation, interest rates and economic growth, with opaque war aims and an ambiguous time horizon, that impact is hard to quantify. On the VT Chelsea Managed range, we have been taking steps to minimise the volatility for our investors.
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The immediate impact on stock markets of the Israeli/US strikes on Iran has not been as severe as previous crises such as Covid or the Global Financial Crisis. In the immediate aftermath of the Covid lockdown stock markets fell sharply. Since the start of the war, the S&P 500 is down over 3%, while the FTSE 100 is down just under 8%**.
However, the bond market has seen a far greater hit. The UK 10-year bond yield has moved from 4.3% at the start of March, to 4.9%, as of writing on 19 March 2026. This a sharp move over a short period of time, although similar volatility has been seen during previous episodes such as the 2022 gilt market disruption. Where bond markets lead, equity markets often follow. There is a sense that investors are biding their time, waiting to judge the severity of the economic impact before making a decision.
The severity of that economic impact builds with every day the Strait of Hormuz is impassable to ships carrying fossil fuels. If the Strait were to reopen within days, the global economy might escape with minimal impact. However, a prolonged disruption could begin to ripple through the global economy – into food prices, goods prices and secondary inflation. Ultimately, it will start to destroy demand, leading to slower economic growth and even recession.
For the time being, however, no-one knows. Even the Federal Reserve Chair Jerome Powell admitted that forecasting was difficult in this environment. Referring to the “Summary of Economic Projections (SEP)” released with the Fed meeting outcome, he said: “If we were ever going to skip an SEP, this would be a good one, because we just don’t know”.
Portfolio positioning
To date, Asia, emerging markets and Japan have seen the heaviest losses. Asia remains a significant oil importer and, while many countries have built up reserves, this can only provide a temporary cushion if the Strait stays shut. The UK and European markets are also exposed and have seen sell-offs. The US has been relatively stable, but the only area really gaining ground is the energy sector.
At the start of the war, many investors were positioned on the wrong side of this trade, anticipating a weaker dollar, lower interest rates and a buoyant global economy, fuelled by government spending packages in the US and across Europe. In the VT Chelsea Managed portfolios, this wasn’t our view. We were naturally cautious, not because we anticipated a pullback but markets had seen three years of double digits returns and moderation in risk seemed appropriate.
Our response to this latest bout of volatility has been three-fold. First, we have sought to reduce the stock market exposure across the funds. We had not put capital in the US for over a year, believing that stocks looked expensive. We are sticking with that position, even if the US markets have proved moderately defensive in the recent stock market turmoil. High valuations remain a significant point of vulnerability in choppy markets.
We have also taken money from our holdings in Asia and emerging markets. We had started to rediscover emerging markets after the sector revived in 2025. However, until the situation in Iran is resolved, Chinese and Indian markets are likely to remain under pressure.
We have also pared back our exposure to UK smaller companies. There is still plenty of value in this part of the market, but the sector remains vulnerable to higher borrowing costs. Soaring UK bond yields have been a notable feature of the market’s response to the crisis. This is likely to slow an already weak UK economy, and keep sentiment towards smaller companies depressed.
On the funds’ bond allocation, we have sold down our gilt allocation, believing the risks are now too unclear. We have replaced this with short-dated bonds. Usually, investors would expect to be compensated for investing in longer-dated bonds – there is greater exposure to fluctuations in interest rates and inflation, for example, and capital is tied up for longer. However, today, the gap between yields on long and short-dated bonds has fallen. We see no reason to take the risk on longer-dated bonds if there is insufficient compensation for doing so.
A final area of focus has been to put protection in place. Here, our priority has been to top up our oil holdings. While the funds cannot invest in futures products – which rules out a lot of the direct oil price ETFs – we can invest in the oil majors. We have been using the iShares MSCI World Energy ETF to take exposure.
We already had some holdings in the renewable energy sector, particularly in investment trusts. We had been attracted by the high yields – as high as 10-12% in some cases – but they have proved a source of strength in the recent turmoil. They had been significantly out of favour and many trusts were trading on significant discounts to the net asset value of their underlying assets. Higher energy prices will help renewables prices as well and should support the long-term income and growth potential for this part of the market.
Ultimately, in the last inflation-induced crisis in 2022, investors needed to be more thoughtful and creative in their approach to portfolio construction rather than hoping that a ‘plain vanilla’ bond and equity strategy would do the job for them. Then, as now, bond and equity markets fell in unison. We are active in finding those areas that can protect client assets at a time of jeopardy for global stock markets.
