Highlights
Volatility rose sharply across financial markets in March, as the escalation between Washington and Tehran led to a near‑complete closure of the Strait of Hormuz through which roughly 20% of global oil consumption normally transits.
Over the past five decades, five major conflicts have triggered sharp increases in oil prices. While no perfect parallel exists, the experience of the Gulf War nonetheless suggests that the situation could deteriorate further before improving.
Fortunately, current oil price levels and the global economy’s reduced sensitivity to oil shocks suggest that a recession remains largely avoidable. That said, the longer maritime traffic in the Strait of Hormuz fails to resume, the greater the risk economic consequences will intensify in a non‑linear fashion.
Moreover, beyond the United States’ energy resilience, more serious challenges are emerging in Europe and Asia, compounded by supply‑chain disruptions that extend well beyond the energy sector alone.
In this context, we reduced our equity allocation to a neutral level and increased our exposure to bonds on March 19. Still‑solid earnings expectations suggest that equities could rebound quickly should geopolitical conditions improve more favourably in early April. Failing that, the absence of excessive pessimism and still‑elevated valuations point to downside risk.
Bottom Line
Overall, the base‑case outlook remains constructive, supported by earnings growth. Recent positioning reflects this view: increasing exposure to emerging markets amid improving earnings momentum, while taking profits in Canadian equities after significant outperformance and a material narrowing in valuation discounts.
Finally, the risk of higher bond yields now appears more limited, while developments in gold prices continue to leave us perplexed, despite the pullback observed in March.