top of page

Investment Committee - March 2026

  • 7 days ago
  • 3 min read

Beyond the Fear: Pricing the Inflationary Reality of Global Conflict



The Dominant Theme: The Erosion of the "Safe Haven" Utility


The March session centered on a fundamental breakdown in traditional macro correlations. As the conflict in the Strait of Hormuz transitioned from a speculative risk to an active blockade, the traditional "flight to safety" failed to follow the historical playbook.


While US Treasuries and Gold typically rally during periods of kinetic warfare, we are witnessing a structural decoupling. The immediate upward pressure on oil (WTI testing $77) and freight rates has triggered a potent "inflation shock" that effectively cannibalizes the protective utility of long-duration fixed income. The committee’s focus has shifted from simple risk-off positioning to navigating the "bear steepening" of global yield curves, driven by the aggressive repricing of inflation swaps.


Historical Context: The Japanese Spark and the Yield Spike


The current environment is an extension of the volatile start to 2026, which began with a structural upward repricing of Japanese Government Bond (JGB) yields. This "Japanese Spark" pulled global rates higher, causing a sympathetic 20–40 basis point spike in UK Gilts and US Treasuries.


While late February saw a brief "positioning squeeze"—where the 10-year US Treasury yield retreated to 3.92% on war fears—the actual onset of conflict has fundamentally shifted the market’s focus. Investors are no longer pricing the fear of war, but its inflationary consequences. Consequently, nominal yields are being forced higher across the curve, rendering long-dated bonds a compromised asset class for capital preservation.


Special Topic: Iran-US Conflict Transmission Channels


Drawing from recent research, the committee identified three primary channels through which the US-Iran escalation is reshaping the macro outlook:


  1. The Uncertainty Multiplier: Sustained geopolitical uncertainty is estimated to cost the Euro area ~0.25% of GDP. Unlike the 2022 shock, where fiscal policy could lean against the wind, 2026 presents a "fiscal exhaustion" scenario where governments have limited space to cushion the blow.

  2. Energy Intensity: Europe remains highly sensitive to natural gas and LNG disruptions, particularly from Qatar. This shifts the narrative of inflation swaps from "transitory" to "persistent," complicating the path for central bank easing.

  3. Supply Chain Slack: A critical silver lining is the global shipping fleet, which grew by over 2 million TEUs last year. This capacity buffer has so far prevented the pandemic-style "hyper-inflation" in non-energy goods, even amidst the blockade.


The Current Environment: Divergence and the Dollar Peak


Equity markets have remained remarkably resilient, yet internal rotations are becoming increasingly violent. We observed a "parabolic" correction in the South Korean KOSPI and a valuation-driven sell-off in the SaaS sector as yields stabilized at higher levels.


In the currency markets, the US Dollar has functioned as the primary refuge, driving the Euro toward the 1.13 handle. We view this as a tactical peak; should conflict levels normalize into a "regime of stability," we anticipate a mean reversion for the Euro toward the 1.19–1.20 range.


Strategic Mandate: Defensive Value and Systematic Discipline


The committee concludes with a mandate of "Controlled Resilience," prioritizing "Value" as the new defensive ballast for the portfolio.


  • Fixed Income: Maintain a Low Duration stance to insulate against the continued upward drift in terminal yields and the risk of further bear steepening.

  • Currency: We view current USD strength as a tactical exit opportunity. We are reducing USD exposure to lock in currency gains and position for a structural Euro recovery.

  • Equities: We remain invested in core equity allocations, overweighting Value and Dividend Leaders. These assets act as a buffer against yield volatility and provide a structural yield that nominal bonds currently lack.

  • Systematic Anchor: While our equity strategies remain fully deployed, our volatility strategy has transitioned to a defensive posture. This shift is a direct response to extreme values in the Volatility Risk Premium (VRP), where the current cost of protection versus realized volatility mandates a preservation-first approach.


Authors: Kostas Metaxas, Yiannis Sapountzis and Kostas Asimakopoulos

 
 
bottom of page