H1 2026 saw geopolitics storm back into the limelight. US and Israeli strikes hit military assets and key personnel in Iran, including the killing of Supreme Leader Ayatollah Ali Khamenei. The hope was that, by killing key figures and decimating Iran’s military infrastructure, the Middle East would become a more peaceful region in the long-term. The operation was framed by President Trump as a "liberation moment" for the Iranian people, with the expectation that decapitating the regime would trigger its swift collapse.
However, rather than collapsing, the Iranian regime has proven resilient, even emboldened. The conflict has cost billions of dollars and caused significant damage to neighbouring Gulf states. Iran has also proven that it can effectively close the Strait of Hormuz whenever it fancies, which hastremendously strengthened its negotiating position both now and in future.
A 14-point memorandum of understanding was eventually struck and signed in Geneva in mid-June. Key provisions included the reopening of the Strait of Hormuz to commercial shipping, the temporary lifting of US oil sanctions, a $25 billion release of Iran's frozen assets, and a commitment from Tehran not to manufacture nuclear weapons. However, formidable sticking points remain. The US demandeda 20-year moratorium on uranium enrichment; Iran has agreed to only five years. Iran continues to assert uranium enrichment as a legitimate and inalienable right, while the lifting of all US and UN sanctions remains a non-negotiable demand from Tehran. Concessions will be required from both sides. The bigger they are from the US though, the harder it will be for Trump to claim a meaningful victory. And without a durable agreement, the risk of renewed conflict remains very real. Indeed, the start of H2 has seen an abandonment of any ceasefire and the Strait of Hormuz effectively re-closing.
For financial markets, the main implication of the conflict was the oil price shock. The closure of the Strait of Hormuz, through which approximately $500 billion of energy trade and 20% of the world's oil supply passes annually, triggered the largest oil market disruption in recorded history. Global oil supply fell by 10.1 million barrels per day in March alone. Brent crude surged by approximately 65% in a single month, recording its largest-ever monthly rise.
However, a few factors have so far prevented the shock from inflicting significant lasting damage on the global economy. The US increased production and exports, China has run down its strategic stockpiles, and oil and gas supply chains rerouted more effectively than had been hoped. By the end of H1, Brent had fallen back to around its pre-war levels.
The conflict has highlighted a shift in global order. In a previous piece, I wrote about how drones have completely changed warfare. It is now very clear that the US no longer controls the world’s sea lanes, compromising its ability to play “global policeman”. Arguably this makes for a much more unstable world. However, the age of drones could actually mean the opposite. The world has seen the difficulties the Russians are having against Ukraine, which was initially expected to capitulate in a week. Observers have also seen the effectiveness of Iran at damaging the US and its partners. The lesson that military action could impose severe and unpredictable costs might push regional and global powers towards diplomacy rather than war.
Back home, politics is in the headlines, with Andy Burnham replacing Keir Starmer as Prime Minister. He will need to settle markets with a credible economic plan which is not that easy. The UK faces an uphill battle with its finances over the coming years and decades. Among many issues, this is because expenditure has not been brought back under control since lockdowns, welfare spending has rocketed, and the longterm demographics are challenging. Burnham has sought to reassure bond markets, publicly supporting the existing fiscal rules and acknowledging "the realities of the UK's fiscal position". However, he has also advocated nationalising several sectors of the economy and has pointedly refused to rule out tweaking the fiscal rules once in office.
Markets will be watching carefully. The ghost of the 2022 Truss budget remains a vivid reminder of how quickly investor confidence can evaporate when fiscal credibility is questioned. The UK is not on its own, though; many Western countries are battling troublesome deficits, and growth in developed markets is likely to remain sluggish as a result. However, growth in many emerging markets is set to remain strong. This should support global growth and provide a reasonable environment for many companies to continue to increase their profits.
Artificial intelligence is redefining working life for vast numbers of people. For many, this brings excitement about productivity gains and the potential to drive economic growth. For others, the concern is that AI is displacing jobs and could eventually operate beyond human control. There areclearly opportunities to make investment gains from the AI theme. However, some of the stocks riding the AI hype could well be in bubble territory. Our portfolios are positioned to benefit from the theme, while remaining cautious of some of the related risks, particularly where valuations are stretched.
H1 reminded us once again of the importance of being patient when the world may seem to be in turmoil. The second half of the year brings with it continued fragility in the Middle East, a new UK prime minister needing to establish credibility quickly, and an AI-driven equity market navigating the fine line between the transformational opportunity and stretched valuations.
The value of your investments can go down as well as up, so you could get back less than you invested.
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