How higher energy prices may impact portfolios
- Frank Talbot
- 8 hours ago
- 3 min read
It is impossible to second guess the next move in markets given the underlying complexity of the war in Iran. Particularly given the impact that President Trump’s comments are having on markets. What is becoming increasingly apparent is that even with a swift resolution to the conflict, the disruption from the war will result in inflated energy costs for some time.
Futures contracts for oil are currently pricing in the scenario that Brent Crude will have fallen from its current level $110 a barrel to somewhere around $80 by the end of the year. Implying that they are pricing in a relatively swift resolution. However, what if we are set for a period where oil prices remain in the $90 and above range, a plausible scenario given the disruption to energy infrastructure in the region. If that’s the case how will different asset classes fare and how do we manage portfolios in the uncertainty.
Brent blend crude futures prices
Fixed Income
Government Bonds
Inflation will have a significant bearing on government bond prices. The move in energy prices has had an immediate impact on the sector with their value falling as inflation expectations have risen in line with the prospect of rate rises. So, the inclination might be to avoid them, however they will rally if the conflict is resolved quickly. At the same time if the higher energy prices are sustained and look like they will trigger a recession, rates will have to come down. Historically in a recession government bonds do well. However, if we enter the tail risk scenario that we are bound for stagflation (high inflation, no growth) then they will suffer.
Corporate Bonds
Corporate bonds are in rude health with strong earnings and balance sheets. They are typically shorter duration than government debt so have not been impacted as much on relative basis, although spreads have widened from the historical tightness they had coming into the conflict. The longer this conflict drags on and energy prices remain elevated, then profitability of companies will be impacted. The same is true of high yield bonds which have also been incredibly resilient and are yet to buckle.
High yield has performed best among debt types this month due to the limited impact of inflation.
Past performance is not a guide to future returns.
Equities
Traditionally in an environment of elevated energy prices then those industries which consume lots of energy like industrials, aviation and so on will suffer. While those which are less sensitive to it like consumer staples, healthcare, financials, utilities, infrastructure and technology stocks will do better. With a large caveat on technology given the increasing energy demands from data centres.
US equities
As the US is a net exporter of energy following the shale boom of the late 2000s and 2010s, it is uniquely placed among its developed market peers and has more of a cushion. Particularly when it comes to their ability to hold or even raise rates given the higher economic growth of the US. This has led to the dollar, which was on a downward trajectory for most of 2025, rallying to its highest levels since May last year. Its place as the safe haven currency though tested in recent years has been restored.
Oil futures are pricing in a benign scenario for oil, but what if we don’t get that?
The UK, Europe and Japan were flying high prior to the conflict but have been reigned in.
Past performance is not a guide to future returns.
Managing the uncertainty in portfolios
This is when diversification of client portfolios really comes to the fore, predicting the outcomes from here is somewhat of a fool’s game given the myriad of possibilities. But ensuring that we adequately insulate portfolios from the worst outcomes is core to our investment philosophy.
The reality is that we believe the positive outcomes are no longer on the table in the short to medium-term. In February we made the decision to protect portfolios by decreasing our exposure to Gilts, European and UK smaller companies, as well as moving a large percentage of our government bond holdings into short duration debt.
As short duration is close to cash, it leaves us with some dry powder to redeploy once the situation improves. When that happens, we will most likely start in credit markets where the mean reversion characteristics are stronger and then assess the opportunities in equity markets, where the path is likely to remain uncertain for a while longer.
Frank Talbot, Head of Investment Research
