The war in Iran heralds a period of prolonged market and economic disruption, according to Alex Brazier, global head of investment and portfolio solutions at BlackRock, who said that different countries will experience the shock in different ways.  
 
“On the Middle East, we don’t know how this plays out,” Brazier told a media briefing on Tuesday. “Regardless of that, we feel we’re in a period of prolonged disruption rather than a short, sharp shock, and we don’t think we go back to where we were.” 
 
Brazier said that feeling is supported by the 12 month forward oil price, which has gradually drifted up over time, but that the impact can also be observed in commodities like liquid natural gas, fertiliser and even helium and sulfur.  
 
“We see this as a much broader supply shock than oil markets, and, in that sense, what happened in Europe in 2022 gives us something of a playbook where supplies of gas were disrupted and supply chains were re-worked but you’re ultimately in an environment that’s higher cost and higher input than you were before.” 
 
That translates to a global growth shock, Brazier said, though its impacts will be felt differently everywhere. Europe and Asia will be hit harder, while the US will be less affected, though it will experience higher gasoline prices.  

Investors like QIC have adopted a wait-and-see approach, with CIO Alison Hill telling Investment Magazine sister publication Top1000Funds.com that it is “really too hard to say whether this conflict will last”.

“Hopefully if it is relatively constrained, markets may look through this, but we are going to be watching market reactions, but at this stage, no changes to the portfolio,” Hill said in early March.
 
But Brazier said that while Iran is “front and centre”, investors can’t afford to take their eyes off two other shifts that were underway prior to the start of the war: inflation and AI. 
 
In the US, the Fed is undergoing an “RBA-light” moment where it realises that there’s more pressure on capacity in the economy than previously thought, causing it to rethink potential rate cuts.  
 
“For us, this is another example of a more general regime shift from a world where what markets grapple with is how quickly the economy is growing,” Brazier said. “When the economy is growing rapidly, you expect the central bank to raise rates and you get a nice negative correlation between stocks and bonds.” 
 
“[We’re moving to] a world where what markets are grappling with is not how quickly the economy is growing but how quickly an economy can grow without generating inflation. And once that’s the question, stocks and bonds move in the same direction.” 
 
That has “pretty serious implications for the way people construct portfolios, Brazier said, adding that BlackRock has observed increased client interest in portfolios that generate a return not from making a broad call on market direction but from making c all on how one part of the market moves relative to another – i.e. liquid alternatives and other strategies and asset classes that are not correlated with the broad market.  
 
“People are building portfolios that are very nimble on the equity side, and they’re building more diversification through alternatives,” Brazier said.  
 
Meanwhile, the AI trade is continuing to play out; AI models have reached a point where they can have “real impact”, which the market realised in the second half of the year, leading to the repricing of software companies.  
 
“What is interesting is that the beneficiary trade then wasn’t so much the US hyperscalers but the hardware: the semiconductors, the air conditioning, everything that’s going to be required to actually deliver the AI stack.” 
 
“Investors are looking to get exposure to a broader AI [thematic] which has much more emerging markets in it… even through this energy shock, clients say they plan to add to exposures in emerging markets and Asia, as well as in commodities.”