War and peace: Impact on long-term portfolio investors
War and peace: Impact on long-term portfolio investors
We believe it is critical for investors to maintain a strategic focus on building resilient portfolios to ensure long-term portfolio outcomes, rather than being whipsawed by volatile market conditions.
Jean Chia
Managing Director,
Global Chief Investment Officer,
Chief Investment Office,
Bank of Singapore Limited
Since the start of the Middle East conflict, the oil price shock has increased economic risks and added volatility in markets. The closure of the Strait of Hormuz has tightened the noose around global oil supplies and trade routes. Higher oil prices are an exogenous shock that transmits directly through energy prices and business costs into inflationary expectations, growth and monetary policy outcomes. Countries, industries and companies with built-in shock absorbers such as diversified energy sources and supply chain resilience will typically fare better in periods of energy stress, though second-order impacts on corporate and individual economic decisions can lead to demand destruction.
We believe it is critical for investors to maintain a strategic focus on building resilient portfolios to ensure long-term portfolio outcomes, rather than being whipsawed by volatile market conditions. This involves adjusting portfolio allocations for diversified economic exposures, building portfolio hedges and managing risks actively.
US-Iran developments and economic data serve as valid market indicators but should not be used to instruct strategic entry and exit into markets. Instead, investors can maintain a structured and deliberate investment process with a strategic asset allocation (SAA) strategy anchored on core principles of diversification, prudent risk management and calibrated risks. This would be a solid foundation on which to adjust to market developments.
As we head into 2Q2026, several key themes and Supertrends will shape markets:
1. A rupturing world order
The US-led world order of free markets, free trade and globalisation that prevailed since the end of the Cold War is fast cascading into one of power rivalry, regional wars, steep trade barriers and populist policies.
Middle powers in the Americas, Europe, the Middle East, Africa and Asia will increase spending on defence, semiconductors, artificial intelligence (AI), energy supplies and critical minerals, reshape supply chains to increase resilience and repair frayed relations.
2. Portfolio resilience reinforced
In a more complex investment phase with heightened geopolitical inflationary and growth risks, maintaining diversified sources of returns across asset classes will be key for managing both cyclical and geopolitical risks.
As part of a whole portfolio approach, investors can retain core investment exposures to multiple asset classes, complemented by portfolio hedges to reduce portfolio volatility. Investments with a lower correlation to overall markets can limit severe drawdowns to enhance risk-adjusted returns over the longer term.
Based on our historical analysis of oil price shocks, potential candidates for portfolio hedges within diversified global portfolios include high quality fixed income, large cap stocks from defensive sectors, diversified currency exposures, as well as real assets. Despite recent volatility, we see gold as part of long-term portfolios as an effective hedge against inflation, fiscal sustainability concerns, and geopolitical risks.
Depending on investor suitability and risk appetite, derivatives and structured product strategies can buffer short-term downside volatility in portfolios or redesign portfolio outcomes to benefit from elevated volatility of selected assets.
3. Asia: Recalibrating preferences
Asia’s economic transformation is set to contribute 60% of global growth by 2030. The relentless pursuit for leadership in technology and sustainability amid geoeconomic fragmentation, environmental changes and demographics shifts provide ample opportunities for long-term investors.
Despite the impact of high energy prices on Asia’s oil-importing economies from the Middle East conflict, our long-term focus on Asia’s economic prowess remains intact given the following key drivers:
- China’s domestic innovation engine continues to accelerate, supported by strong state-led investments in advanced manufacturing, renewable energy, semiconductors and AI. Hong Kong, meanwhile, is strengthening its role as a gateway for global capital into Mainland China and the broader region.
- Various Asian countries undertaking value-up programs to enhance their stock markets, while emerging sectors such as green finance, wealth management, and digital assets are also attracting investment flows.
- Asia is also taking up the mantle of sustainability leadership, particularly as other regions are wavering in their commitments.
Within Asia ex-Japan equities, we prefer Hong Kong, China and Singapore markets for exposure to quality yields and low beta stocks as near-term defensive plays, while focusing on medium to long term structural themes, such as AI proxies and policy beneficiaries in technology innovation and domestic consumption.
Singapore’s more flexible fiscal position blunts the impact of higher oil prices compared to many of its Asian peers. The government’s roll-out of the Equity Market Development Programme (EQDP) should drive greater liquidity and unlocking of value of Singapore equities.
4. AI: Disruptors and the disrupted
AI is simultaneously creating disruptors and disrupted companies. Advances in large language model (LLM) capabilities have shifted market sentiment from AI boosting productivity to concerns around business disruption for selected sectors, such as software to other non-tech sectors such as insurance brokers and real estate services. While near-term market momentum remains unfavourable for AI-vulnerable sectors, opportunities arise for patient investors in companies with defensible moats in the AI era. Regardless of AI application leadership, compute demand and semiconductors will be set for outsized growth built on hyperscalers’ ambitious capital expenditure plans.
Overall, we emphasise the importance of focusing on structural themes and long-term strategic thinking in building portfolios for wealth investors.
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