The conflict in Iran has moved from an acute crisis to a fragile de-escalation, but a fuller resolution remains elusive. Market sentiment may still be tied to developments in the Middle East, but we believe that the bulk of the disruption is now behind us. We note that transit through the Strait of Hormuz has resumed, reducing the key risk that a prolonged disruption could sustain higher energy prices.
Despite these risks, our macroeconomic outlook remains relatively optimistic, with risks tilted to the downside. The US economy remains central to our global outlook in 2026. We believe it will be able to absorb elevated energy prices, in line with what we have observed in 2023 and 2024, with the most likely outcome being a re-acceleration of growth driven in part by technology-led productivity gains. We continue to expect US inflation to moderate, although elevated energy prices have delayed that process, and we believe the Fed could have scope to ease monetary policy next year. Stickier inflation nonetheless remains a risk to this central view.
Outside the US, most developed economies are expected to remain resilient, supported by moderate growth and declining inflation, with Japan representing a notable exception as gradual policy tightening continues. That said, the conflict in the Middle East introduces upside risks to inflation in Europe, where the effects are likely to be amplified by the continent’s reliance on energy imports.
We favour a long-duration position in portfolios, particularly at the front end of the US curve, as well as in select emerging markets. However, given the potential upside risk to inflation expectations, we aim to retain flexibility to add to these positions should pricing become more attractive. Credit valuations have reversed much of the weakness experienced in March and remain near the most expensive end of the historical range. We also believe dispersion across and within sectors could increase, which emphasises the need for diversification and strong bottom-up fundamental analysis.
Given our central views, we maintain modest overweight positions across credit sectors, with a bias towards higher-quality sectors such as investment-grade corporates or higher-quality securitised assets. Alongside our long-duration theme, we prefer positioning portfolios for steeper curves, particularly in the US and Germany, which we believe could provide some protection in an economic slowdown or in an environment of more expansionary fiscal policy. In our currency strategy, we hold an underweight position in the US dollar, although less pronounced than earlier in 2025. This positioning is expressed against a diversified basket of developed- and emerging-market currencies such as the euro, the Japanese yen, and the Brazilian real.
