Conflict between the US and Iran has evolved into a prolonged global supply chain shock, spreading across energy, trade routes and critical commodities. We explore the strategies that could best insulate investors from the growth and inflation impact to come.
Key takeaways
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01
Since the US and Israel’s attacks on Iran at the end of February, oil prices have risen more than 60% while major equity markets are down more than 5%, with some entering correction territory1
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Attacks on major commodities infrastructure in the Middle East and the closure of the Strait of Hormuz indicate a prolonged disruption to global supply chains, with significant impacts to growth and inflation
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To cushion the blow on portfolios, we lean into strategies with low volatility, lower correlation to broad equities, and minimal sensitivity to interest rates
An evolving crisis
The second year of Donald Trump’s presidency has so far proved as unpredictable as the first. Following US-Israeli strikes on Iran in late February, Brent crude oil prices are up more than 60%2 as Iran retaliates from the attacks by effectively blockading the Strait of Hormuz and striking energy infrastructure in other Middle Eastern states.
Both the S&P 500 and ASX 200 are down around 7% since the conflict began, while the Nasdaq 100 Index has entered correction territory.3
Locally, broad US equities have seen the most outflows across all iShares products in March, followed by global high yield bonds (with over 50% US exposure) and Europe, Asia and the Far East (EAFE) exposures – indicating that confidence in the US economy and broad developed market shares may be waning.
From an inflow perspective, investors are choosing to take hedged or actively managed exposure to US shares to better manage future equity and currency market volatility, while taking advantage of dislocations to buy into to share markets like Europe and Australia.
Looking ahead, with the outcomes of the conflict still uncertain, we have dialled down our exposure to risk assets to avoid making calls on the broad direction of equity markets.
However, these supply shocks highlight thematic opportunities to tap into which were already underway before the conflict and underline the importance of building more resilient portfolios for the new investing environment.
Equities: Look for low volatility, low correlation options
Implementation ideas - Infrastructure, minimum volatility
The economic shock emanating from the Middle East conflict is intensifying governments’ push to secure energy supply and build resilient supply chains, making infrastructure a natural long-term beneficiary of the crisis.
Infrastructure’s essential nature also reduces its susceptibility to disruption or the fluctuations of the business cycle - which has historically translated into returns similar to the broad equity market, but with meaningfully lower volatility.4
Comparable returns with historically lower risk than global equities
Source: BlackRock/eVestment data from 1 January 2006-30 June 2025. Global equities represented by MSCI All Country World Index, Global Listed Infrastructure represented by FTSE Core 50/50 Global Listed Infrastructure Index.
Over the last two years as global equities have faced a rollercoaster ride driven by macro volatility, rising geopolitical risk and AI valuation concerns, infrastructure has shown a low correlation of just 0.03 to equity market performance.5
Minimum volatility strategies are another option for investors looking to reduce the impact of drawdowns, having significantly outperformed broad equity markets during key downturn periods such as the GFC and COVID onset.6
Performance in past market drawdowns – minimum volatility vs global equities
Source: MSCI as of 8 July 2025. Based on comparative net performance in US dollars from MSCI World ex Australia Index peak to trough during the 4 biggest corrections in the MSCI World ex Australia Index over the past 20 years. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance and simulated past performance is not a reliable indicator of future performance.
As volatility set in earlier this year, the MSCI World ex Australia Minimum Volatility Index returned 0.86% in the three months to February 2026, versus the MSCI World ex Australia at -4.6% - demonstrating the advantage of leaning into this type of strategy at times of market nerves.
The tight risk control of the index to MSCI World also makes it suitable as a long-term core holding alongside or replacing vanilla global index exposures, as both indices are shown to generate similar returns over the long term7.
Fixed income: Brace for potential stagflation
Implementation ideas: cash or cash-plus, inflation-linked bonds
Rising oil prices add a significant layer of complexity to Australia’s domestic inflation challenge that pre-dates the Middle East conflict. The risk of a flow-on impact to services inflation and wages is real, supporting the case for an aggressive hiking cycle from the RBA per the consensus view.
But given the drag that oil prices will place on economic growth, we think the three additional rate rises currently priced in are unlikely.
The latest Australian services PMI signalled a significant contraction in activity, and minutes from the RBA’s split March meeting show board members who voted for a hold were concerned about already weak domestic consumption being affected by the fuel price surge.
For those wary of carrying significant duration given the uncertainty of the rate path, cash and cash-plus ETFs continue to deliver income in line with the cash rate of around 4% p.a., without meaningful sensitivity to yield moves.
In the case of a low-growth, high-inflation environment where the RBA is hamstrung in its ability to hike, inflation-linked bonds offer protection by adjusting investors’ principal amount with CPI.
The iShares Government Inflation ETF (ILB) has seen more than $100 million in flows from local investors in March, indicating concerns of a potential ‘stagflationary’ environment ahead.
Diversifiers: Take advantage of dispersion
Implementation ideas: Liquid alternatives, gold
The inflationary pressures of the current energy shock have again placed the spotlight on the US fiscal position, which is likely to face further pressure if the Federal Reserve needs to pause or hike rates.
Rising government debt has in recent years seen equities and bonds move together around 75% of the time8, disrupting the traditional role of bonds as portfolio diversifiers.
We believe investors need to look further afield for protection against equity market volatility – particularly towards liquid alternatives, which are able to take advantage of cross-sectional volatility in equity markets and generate returns that are uncorrelated to equities.
BlackRock’s Global Liquid Alternatives Fund achieved flat performance during the last three ASX 200 downturns of more than 7%, and has generated a similarly flat return during March 2026, the worst month for the local index since 2022.9
Looking to low correlation options: Correlation of BlackRock ‘diversifier toolkit’ strategies vs equities & bonds, 2024-2026
Source Morningstar, 28 Feb 2026 Time period: January 2024- January 2026. Currency: AUD. For more on BlackRock diversifier strategies visit: https://www.blackrock.com/au/solutions/diversification-toolkit
Despite the reset in prices over the past week, we also still like gold as a tactical play with idiosyncratic drivers in the current environment.
The precious metal should continue to benefit from the erosion of other traditional safe haven assets as developed market government debt rises – gold overtook US Treasuries last year as the largest share of global central bank reserve assets for the first time since 199610.
As we look to position portfolios for a low-growth, high-inflation environment, we also stand ready to adjust our risk exposure quickly if a de-escalation of the conflict occurs. But the current conditions justify a more dynamic investment approach that aims to manage risk in the short term.
