Scenario planning on the Middle East conflict

Artificial intelligence may still be capturing most of investors' attention, but we think that the situation in the Middle East still deserves some of our time. Not because the headlines are new, but because a range of outcome is still wide and the market impact runs through energy, inflation and central bank policies. So in this episode, I'm going to lay out three scenarios, the best-case scenario of the Strait of Hamuz being reopening soon, which are things to the most likely scenario, second, and extended closure of the Strait. And finally, the worst-case scenario, where a deterioration in conflict, lead to sustained damage in energy production and transportation infrastructure. Hi, welcome to on Investors Minds. I'm Tai Hui, the Chief Mark Strategist for Asia Pacific at JPMorganism Management, and thank you for giving us a few minutes of your time to understand what investors are thinking right now and how to build the right portfolio. So in this episode, we're not really forecasting where things are going to be, but rather a scenario planning exercise, hopefully to guide you through the thinking process on how to react to the different outcomes. So let's start with the de-escalation scenario. The US and Iran have been negotiating for some time, and there are signs that an extension of ceasefire could come, as was the reopening of the Strait of Hamuz. President Trump has signaled this a number of times, but the traffic across the Strait remains just a trickle. So the core of this scenario is to see actual shipping traffic through the Strait instead of what the government say. So in this scenario, the Strait reopens in the near term and shipping patterns normalize over roughly six to eight weeks. As a result, oil settles into a higher but manageable range, roughly 80 to 90 dollars. This is because inventory will need to be replenished around the world, and insurance companies may still be charging a higher premium. The key point is that inflation is still likely to stay elevated into the second half of 2026, and potentially into early 2027, even as the worst tail risk failed. Policy wise, the framework is relatively straightforward. The Federal Reserve holds not cutting, but also not forced into a renewed tightening. In contrast, the European Central Bank and the Bank of England may still be delivering modest hikes in the next couple of months, reflecting their inflation sensitivities and also differing growth dynamics. From a market standpoint, you typically expect a bull's-deepening in a U.S. Treasury curve. The front end of the curve coming down with a greater probability the Fed will hold. Equities can move into a more constructive risk on posture, with benefits spreading to a wide range of sectors such as consumption and also industrial. The U.S. dollar is also likely to soften as safe haven demands unwinds. If you are an investor, the message here is, this is not back to normal just yet, but the tail risk is being compressed. So we expect investors to position for balanced risk, quality equities, selective security and also fixed income duration that benefits from declining risk premium, while still respecting the persistence of inflation. Now let's turn to the more challenging scenario. The straight remains closed for longer, even torries in energy as well as petrol chemicals get drawn down and start to impact on availability of both of these products as production inputs. Macro conditions are likely to deteriorate with inflation concerns replaced by stack flationary concerns, inflation moving up while growth slows down. Asia is relatively more vulnerable, both because of the trade exposure and also because of supply chain sensitivity tends to be higher. But given Asia's rowing global production, the demand destruction in all part of the world could be felt around the globe. Central banks are facing the worst of both worlds, with only one to let tackle high inflation and weaker growth. The scenario framework is that they may hike initially, responding to inflation and then cut rates later as growth weakens and financial conditions tights in. At the same time, you could see fiscal support broadened as governments attempt to cushion the blow for households as well as companies from energy-linked price shops. Now market behavior in this regime tends to be explicitly risk off. You could see curve flattening, credit spread widening and also a rotation towards resilience and defensive sectors such as energy and utilities, which typically held up better than the broad equity market. In rates, inflation linked bonds have shown greater resilience in the past, reflecting inflation persistence. You should also expect to see a stronger dollar as investors seek liquidity and safety and gold may also help as a hedge against policy and also geopolitical uncertainty, but historically the magnitude of return from gold can be quite inconsistent. Now this scenario also calls for alternatives, such as long short strategies as as was income-oriented real assets as potential stabilizers, rather than just relying solely on the classic 60/40 stock on portfolio that can be challenged in a stack-flation-rich environment. The third scenario is most structurally significant. Reescalation across the region with sustained damage to energy infrastructure. The critical difference here is time horizon. This is not a shipping disruption that clears eventually but a multi-year supply loss that reshapes the energy markets and also investment power-routes. In that environment, long-dated energy futures are likely to rise, reflecting persistent scarcity and risk premium. At a strategic level, it could accelerate a faster push towards renewable energy and also energy independence, not only as an ESG preference but also as a national security and supply chain imperative. You could also see a significant aggressive shift in policy response. When a shock threatens growth and financial stability, central banks tends to power-artize liquidity. The scenario framework as a central banks may move towards reguts and potentially renewed quantitative easing alongside a large fiscal support from governments in order to stabilize economies to offset supply-side impairment. Naturally, you could see markets being much more volatile, not only in equities but also in fixed income. Followed by a potential for a rebound, often as policy support ramps up and investors begin to price in the medium-term winners of a reconfigured energy regime. The scenario points to sectors that are tied to this particular transition and also the infrastructure response, non-fossil fuels, energy storage, re-routing infrastructure and also electric vehicle-related ecosystem. The common threat is that capital gets redirected towards resilience, new supply routes, new energy sources and technologies that reduce exposure to vulnerability choke points. The portfolio takeaway is that this is not just a defensive scenario but a regime-change scenario. Risk management matters at the front end draw down control liquidity when it first happens but there's also a credible medium-term opportunity set in transition-linked assets and infrastructure aligned with energy security. So in summary, these are vastly different scenarios that require different strategies. We're clearly hoping for the best but also being ready for the more volatilities and structural shifts ahead. One thing I hope you have picked up from this podcast today is that there are solutions to each of these scenarios and cash is not the only answer. So this scenario analysis is actually part of our 2026 mid-Jaillook paper that will be released on the 15th of June. Alongside this discussion, we're also sharing our thoughts on AI developments, opportunities in China and also how the mid-term elections could reshape U.S policies. Look out for our mid-Jaillook in your inbox or reach out to your JPMorganized Management Client Advisor. And of course, you can find this paper on the website starting on the 15th of June. I hope you find this episode useful. If you do, please share this with friends and colleagues and of course consider subscribing. If you have any additional questions, feel free to reach out to your JPMorganized Management Client Advisor. I'm Tai Huai. I'll see you next time to discuss what's on the Investments. Meanwhile, stay informed and stay invested. 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