James Flintoft, head of investment solutions at AJ Bell, comments: “Events across the Middle East represent a step change in the risk environment. What matters most from an investment perspective is not the immediate market reaction but what a potentially prolonged conflict means for oil prices, inflation expectations and the appropriate positioning across asset classes.
How AJ Bell is positioned
“In January the AJ Bell Investments team made tactical asset allocations into US Healthcare, Energy and Utilities. These were driven by valuation – all three sectors trade at meaningful discounts to the broader US equity market on forward earnings and have been largely overlooked during the growth and AI-driven re-rating of the past two years. On our analysis, they are complimentary to diversification and long-term potential returns.
“The valuation and diversification case has not changed. What has changed is that the macroeconomic environment has been moving in a direction that further supports tilting towards these sectors. Energy offers direct exposure to a commodity where supply risk has increased significantly. Healthcare and Utilities provide earnings streams that are largely uncorrelated with the oil price and with the kind of demand uncertainty that a sustained energy shock would create across more cyclical parts of the market. The events of the last 48 hours reinforce the logic of owning sectors with tangible earnings, pricing power and valuations that leave room for upside.
“Bond allocations across portfolios are broadly short duration. This reflects a view we have held for a while that the bond market has been underpricing inflation uncertainty. If oil prices settle materially higher for any sustained period, long-dated bond yields will need to reflect a higher inflation risk premium. That is not a backdrop in which we want to own longer dated bonds.
How a longer conflict could impact the global economy
“The stated objectives of the US operation – regime change and the destruction of Iran’s military capability – imply a campaign of weeks, not days. If that is what unfolds, the second-round effects on inflation expectations and the path for interest rates could be substantial, and the bond market will have to adjust.
“If the conflict is contained quickly and oil retraces, our specific sector equity allocations still rest on a valuation case that is independent of the oil price, and our short duration position remains based on longer-term inflation uncertainty that was already too high before any geopolitical premium entered the market. The tactical allocations we made in January were built for rotating markets, as are diversified portfolios. That reality has arrived in 2026 and could be spurred further by this latest catalyst.”
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