The outcome of recent conflicts like the fragile US-Iran ceasefire remains highly uncertain, making it difficult to feel confident about short-term market moves driven by fast-changing headlines.

However, beneath this tactical uncertainty lies deeper structural features of the global environment about which we can have much higher conviction. Rather than focusing on how any particular conflict evolves, investors should consider what these events reveal about the world and what that means for long-term portfolio positioning.

A structural shift toward higher geopolitical risk

Geopolitical risks have been a bigger focus for investors and a driver of returns in recent years, reflecting deep structural forces in the international order.

The period from the early 1990s to mid-2010s, when geopolitical risk was generally low (Chart 1), was historically unusual. That era was characterized by expanding globalization, acceptance of multilateral institutions, and major powers prioritizing economic integration over geopolitical rivalry.

But this "end of history" moment was ultimately underwritten by US hegemony. As America's relative power has diminished, so has its willingness to act as guarantor of global public goods.

History suggests periods of hegemonic transition are inherently unstable. As deterrence structures become less clear and red lines lose credibility, the risk of boundary-testing and strategic miscalculation rises. Critically, economic interdependence – once viewed as dampening conflict – is now increasingly seen as a vulnerability that can be exploited.

"Keys that lock up the world"

The closure of the Strait of Hormuz during the Iran conflict exemplifies how geographic chokepoints can be weaponized in an era of greater geopolitical competition.

In 1904, Admiral Jacky Fisher described strategic waterways – Singapore, Suez, Gibraltar, Dover – as "keys that lock up the world." The Hormuz closure represents a paradigmatic gray swan: well-understood in security circles but low probability and hard to price.

Other vulnerable chokepoints include:

But given how many of the major geographic chokepoints are located in geopolitically fraught areas, it is worth reflecting on other similar gray swan risks (Chart 2).

This geographic metaphor extends to intangible chokepoints: the US uses dollar system control for sanctions, while China leveraged rare earth export dominance in recent trade negotiations.

More frequent negative supply shocks

Historically, a world of elevated geopolitical risk means the economy will face more negative supply shocks – events that simultaneously push inflation up and growth down. The large energy price increase from the Iran conflict is a clear example. Future chokepoint closures would create upward price pressure on affected commodities and trigger second-round effects rippling through supply chains.

Beyond geopolitics, supply chains face disruption from trade disputes, climate change impacts, and potential future pandemics. Even efforts to reshore supply chains constitute a negative supply shock: sacrificing efficiency for resilience implies lost productive potential and a worse growth-inflation trade-off.

Higher and more volatile inflation

With more inflation-inducing shocks, average inflation will be higher and more volatile, converging toward central bank targets from above rather than below (Chart 3).

As households and businesses adapt to this new reality, inflation expectations may drift higher. Wage and price-setting institutions will evolve to reflect distributional conflicts, potentially including increased indexing and greater union power.

These behavioral and institutional changes can make the economy even more prone to persistent inflation pressure, as initial price shocks are more likely to trigger second-round consequences.

Historically, this forces central banks to tighten policy more frequently rather than "looking through" supply shocks, exacerbating negative growth impacts. Interest rate volatility can increase as markets struggle to predict policymaker responses.

Potential investment implications include:

Bonds will provide less diversification¹

We believe fixed income assets are likely to be more frequently positively correlated with equities in a supply shock-dominated world.

Historically, in a demand-shock world, weak growth coincides with low inflation and strong bond performance – providing portfolio diversification.¹ But with supply shocks, weak growth occurs alongside high inflation, causing both bonds and equities to struggle simultaneously.

The negative bond-equity correlation from the 1990s through early 2020s was a contingent feature of that period's geopolitical stability (Chart 4). As geopolitical risk has risen, the correlation has turned positive.

This increased positive correlation makes bonds less reliable for diversification, rendering traditional 60/40 equity/bond portfolios less attractive. Investors must seek new diversification sources like infrastructure and private markets with different correlation structures.¹

Strategic investment themes

Gold and precious metals

Despite recent weakness during the Iran conflict, gold remains a consistent inflation hedge and diversification source.

As the US continues using dollar system control for geopolitical influence, competing powers are shifting central bank reserves and sovereign wealth funds toward gold to minimize confiscation risk. While dollar hegemony won't disappear near-term due to powerful network effects, marginal sovereign reallocations toward gold can still benefit non-sovereign investors through price appreciation.

Defense and infrastructure spending

A world of greater geopolitical risk inevitably means increased defense budgets and infrastructure investment to boost national resilience.

Key developments:

Much of this spending will be deficit-financed, with implications for sovereign bond markets and upward pressure on interest rate structures.

Critical minerals and commodities

China's dominance over strategic resource reserves – including rare earth metals, lithium, cobalt, and copper – creates vulnerability for western economies. This drives investment in securing alternative sources, particularly in Latin America, and in domestic mining and processing capabilities.

Endnotes

¹ Diversification does not ensure a profit or protect against a loss in a declining market.
² White House Seeks $1.5 Trillion for Defense in New Budget Request." The New York Times, April 2026. https://www.nytimes.com/2026/04/03/us/politics/white-house-defense-budget.html.

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