Weekly market commentary

Highly exposedShare of population living in net importers by fuel type, 2022

The Middle East conflict has led to a near-closure of the Strait of Hormuz, disrupting flows of oil and liquefied natural gas (LNG) shipments from the Gulf. This is reverberating far beyond the region as most of the world’s eight billion people live in countries that rely on imported energy. Around 80% live in countries that are net importers of oil, and roughly 60% in countries that import natural gas, according to International Energy Agency data. See the chart. In short: energy vulnerability is widespread and structural. This means disruptions in one region quickly transmit across markets, reinforcing the push for energy security. It also underscores the importance of approaching investments through a thematic lens, especially at times when high uncertainty about the conflict’s outcome makes it prudent to steer away from making large directional investments.

The shock is playing out unevenly across regions. Europe and Asia are both highly exposed to imported LNG, but in different ways: Europe has limited ability to reduce demand, while countries such as Japan and South Korea are exposed to price swings and demand adjustments. The U.S. – a net energy exporter – is more insulated but not immune, as rising global oil prices raise domestic fuel costs. This divergence is driving different outcomes: Exporters are benefiting in the near term, whereas importers face growth and inflation pressures sooner. We are seeing a world shaped by supply play out in real time.

AI driving power demand

We particularly favor what we call “electro tech” – batteries, power electronics and electric motors at the core of AI, energy, infrastructure and defense. AI is not just powering demand; it is tightening links across energy, technology, utilities and infrastructure, pushing up electricity use and the need for power capacity. This is colliding with limited supply of key materials such as copper – especially in fast-growing battery storage. Countries are diversifying supply and expanding grids – supporting utilities, though with returns capped by regulation. They are also reducing reliance on a narrow set of LNG suppliers, keeping prices elevated for now as buyers pay for supply security. Governments are prioritizing local supply chains and energy buildout, with Germany and others accelerating wind auctions, and the UK restricting Chinese turbine supply. They are also ramping up renewables and storage as energy security assets, alongside recycling and efficiency efforts.

All this requires an “all-of-the-above” investing approach. Near-term, higher volatility and dispersion in stock returns favor active fundamental and systematic approaches. Over longer horizons, we favor gradually building positions in themes such as electrification and critical minerals such as copper, nickel and aluminum across public and private markets. We’re selective in renewables, being mindful of higher rates and the challenges of Chinese supply chains. China is a leader in renewables – but that doesn’t necessarily translate into leading equity performance. We like solar, storage and grid tech because it’s in high demand and quick to build. We see energy infrastructure offering stable, inflation-linked cash flows. We favor copper to tap into electrification build-out, even as its performance is subject to economic growth.

Our bottom line

The Middle East conflict and AI-driven power demand reinforce our preference for active, thematic exposures to energy security and the AI theme. We recently dialed down risk but stand ready to adjust quickly.

Market backdrop

The S&P 500 lost 2%, notching five-straight weekly losses for the first time since 2022. The index was also pacing for its worst month in a year amid hopes for de-escalation in the Mideast conflict. Jitters were also evident in rates, with U.S. 10-year Treasury yields rising to 4.43%. Brent crude climbed to $112 per barrel. If prices don’t decline soon, we think the key question shifts from “will central banks be able to cut?” to “will their policy rates keep up with the rise in inflation?”

We expect unemployment to remain broadly stable amid an influx of labor market data across the U.S., euro area and Japan. We look for indications that the labor market stays resilient despite recent signs of softening. In the U.S., the data figures will help assess whether last month’s weaker payrolls print signals broader labor market cooling or sector-specific drivers.