Economic base case scenario modestly downgraded for now: We now assume an oil price of $75/barrel (versus $65 previously), leading to slightly lower growth and higher inflation in both the U.S. and Europe.
Staying constructive, but cautious: We maintain our equity overweight while monitoring closely — history shows geopolitical pullbacks are short-lived unless they become a sustained macro shock.
Key tail risk: A prolonged Hormuz blockade pushing oil above $100 would trigger stagflation concerns and prompt us to trim equities, especially in Emerging Markets.
Coordinated U.S. and Israeli strikes against Iran began on Saturday 28 February, while Iranian retaliation has spread across the region. Without any clearly stated intentions or objectives on the part of the United States of America, these events give rise to numerous hypotheses and uncertainties for the region in the coming months, as well as risks for investors.
For markets and our economies, what happens to oil prices will be key. It is unclear whether the strait of Hormuz is officially closed to shipping, but for the time being the result is similar: about one-fifth of the world's oil and liquefied natural gas is blocked[1]. Moreover, some energy infrastructure in Iran and other countries in the Middle East could be disrupted (Saudi’s Ras Tanura refinery was hit by a drone on Monday morning while Qatar halted LNG production).
For most of 2025 and into early 2026, the oil market was characterized by oversupply as OPEC countries increased output. As a result, Brent crude declined from around $80 per barrel in 2024 to below $70 in 2025[2]. Recent events in the Middle East have clearly altered this dynamic, with prices moving back toward $80 per barrel.
The macroeconomic effect of higher oil prices will depend on both the magnitude and the duration of the price increase. Calls from Israel and the United States for Iranians to overthrow the regime show that neither wants to get bogged down in a protracted conflict. If a durable blockade of the Strait of Hormuz is avoided, oil prices would likely not rise much further. However, given the destabilization of the region, we now assume that prices will remain $10 above our baseline scenario, i.e., $75 per barrel rather than $65[3]. In the United States, we now expect inflation to be 0.3% higher and growth 0.2% lower (2.2% on average in 2026). In the Eurozone, the direct impact of higher oil prices on inflation may be more modest due to higher taxes, but Europe will likely be more vulnerable to higher natural gas prices. If disruptions are temporary, the overall impact on inflation and growth is expected to be similar to the US, with growth close to 1% on average in 2026.
While President Trump has already suggested that the conflict would last 4 weeks, a longer conflict is possible. A prolonged disruption of the Strait of Hormuz could easily push the price of oil above $100 per barrel, as options for bypassing the strait are limited. In the United States, a sustained increase in oil prices to $100 per barrel from $65 would add roughly 1 percentage point to inflation and reduce GDP growth by 0.7 percentage points, bringing year-on-year growth at end-2026 closer to 1% rather than 1.8%. In Europe, growth would be pushed below 1%.
In such a scenario, central banks would be unlikely to react aggressively to higher inflation, as this would represent a supply shock that significantly slows growth—especially if equity markets also decline, amplifying the negative impact on confidence and financial conditions.
The US–Iran escalation over the weekend was not entirely unexpected. Geopolitical risk premia had already been moving higher in recent weeks, reflecting a well-signaled military build-up. Oil had risen around 20% year to date to close to five-month highs, US breakeven had risen, gold had climbed and defensive equities had been outperforming cyclicals[4]. In that sense, markets had anticipated some degree of deterioration.
That said, equity indices — particularly outside the United States — are still trading close to their highs at the headline level, suggesting that a full geopolitical risk premium has not yet been priced in.
Resilient economic activity and disinflation trend have supported our constructive scenario since the beginning of the year and we are keeping this stance. History is instructive here: geopolitically-driven pullbacks tend to be short-lived unless they translate into a sustained macroeconomic shock. The global economy is considerably less oil-intensive than it was in previous decades, and it would take a sharp and persistent rise in energy prices — well beyond our base case — to materially derail growth.
OPEC spare capacity provides a buffer, and political incentives — particularly in the United States ahead of midterm elections — should limit tolerance for structurally higher oil prices. We therefore remain constructive for now.
A move towards $100 per barrel — should markets begin to price a meaningful supply disruption — would intensify stagflation concerns and weigh disproportionately on the most energy-sensitive economies. Emerging Asia stands out as the most exposed region in our allocation: Korea, India, Japan and China all import heavily and would face both a terms-of-trade shock and tighter financial conditions.
At the sector level, Energy, Mining and Defense provide natural hedges in this environment. Conversely, cyclicals, consumer-facing sectors and Airlines remain vulnerable to an oil-driven slowdown. Within equity markets, Europe is trading near highs despite falling yields and could be prone to profit-taking if the situation worsens. More commodity-heavy indices could prove relatively resilient by comparison.
We have added some portfolio protection via derivatives and kept some hedging strategies via precious metals, notably gold.
We are monitoring developments closely and would be ready to trim our equity overweight — particularly in emerging markets — depending on the scale and duration of the conflict.
Candriam funds have no sovereign exposure to Iran, and exposure to Middle East countries remains very limited.
That said, we have become more cautious on emerging markets more broadly, across both equities and debt, for several converging reasons.
On the equity side, a stronger US dollar could tighten financial conditions and narrow the rally to higher-quality names. We have also reduced exposure to Asian tech — particularly Korea and Taiwan — where markets had run well ahead of fundamentals and valuations had become stretched. More broadly, the oil shock creates a clear divide: oil exporters like Brazil or Gulf states may benefit from improved terms of trade, while oil importers — India, China, Egypt, Pakistan — face inflation pressure, wider current account deficits, and less policy flexibility.
On the debt side, we are also more defensive. Sovereign spreads remain historically tight and have not yet priced in any sustained geopolitical risk premium, leaving little margin for error. We maintain hedges in place and are watching for spread widening.
Specific situations also warrant attention. Countries with fragile external positions are most at risk if oil prices stay elevated. Conversely, a weakening of Iran's influence could be a positive catalyst for Lebanon's restructuring prospects. The UAE and Qatar, despite being oil-linked, could face headwinds if regional instability erodes their reputation as stable financial and business hubs.
Overall, while we do not see this as a fundamental change for emerging markets, the combination of geopolitical risk, possible dollar strength, energy price uncertainty, and stretched technicals in parts of the market calls for a more selective approach. Any repricing could be an opportunity.
[1] Source: Bloomberg.com
[2] Source: Candriam, Bloomberg. Average brent crude price over the year
[3] Source: Candriam estimates
[4] Source: Candriam, Bloomberg
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