Too Strategic to Fail
The direct confrontation between the US–Israel alliance and Iran has moved beyond a localised crisis and is now influencing global growth expectations, inflation dynamics, and investor risk appetite. The economic consequences are becoming increasingly differentiated, separating economies with strong fiscal foundations from those more exposed to external shocks. Following the escalation associated with Operation Epic Fury, the strategic calculus for global investors has shifted materially. While the situation remains fluid and the “fog of war” continues to cloud near term visibility, the behaviour of our EPIC Fixed Income Portfolios, comprised of predominantly high-grade sovereign and quasi-sovereign bonds, reinforces the rationale behind our long-standing approach: prioritising structural resilience and strategic importance over speculative yield.
The macro backdrop is largely defined by disruption around the Strait of Hormuz, through which roughly 20% of global oil and liquefied natural gas shipments transit. Supply uncertainty, rising maritime insurance costs and rerouting expenses are effectively increasing the price of energy imports worldwide, introducing a fresh inflationary impulse into global markets. For energy importing regions across Europe and Asia, this dynamic presents clear stagflationary pressures. Industrial economies such as China and South Korea face the prospect of slower manufacturing activity as input costs rise, while import dependent countries including India, Pakistan, Bangladesh and Thailand are particularly vulnerable due to weaker external balances and higher energy import bills. The portfolio currently has no direct exposure to these markets. By contrast, energy exporters and commodity rich economies benefit from higher prices, which provide a natural fiscal buffer during periods of market stress.
Within the portfolio, exposure to Gulf sovereign and quasi-sovereign issuers continues to demonstrate relative resilience. Economies such as the United Arab Emirates, Qatar and Saudi Arabia maintain substantial foreign reserves, large sovereign wealth funds, and comparatively low sovereign debt levels. Strategic Abu Dhabi entities including Mubadala Investment Company and TAQA form part of the Emirate’s core economic infrastructure. Export routes such as the Abu Dhabi Crude Oil Pipeline provide an important layer of resilience by allowing shipments to bypass the Strait of Hormuz.
Qatar also remains central to global energy security. Companies such as QatarEnergy and LNG shipping operator Nakilat play a key role in supplying natural gas to international markets. While QatarEnergy has temporarily invoked force majeure on some LNG contracts amid regional security concerns, the underlying value of the North Field, holding roughly 10% of the world’s known gas reserves, remains unchanged. Qatar’s strategic role as a reliable exporter is therefore likely to reassert itself once the most intense phase of volatility subsides. In the near term, however, our priority remains capital preservation during what we expect could be a four to six week window of heightened market instability.
A second pillar of portfolio resilience lies in geographic diversification across commodity-producing economies. In Latin America, exposure to issuers such as Codelco and Petróleos Mexicanos provides access to copper and energy markets, benefiting rom elevated global commodity prices. Chile continues to stand out within emerging markets due to its relatively stable institutional framework and its central role in global copper supply, while higher energy prices support the cash-flow outlook for Mexican producers. Further diversification comes from KazMunayGas in Kazakhstan, whose exports reach global markets via the Baku–Tbilisi–Ceyhan Pipeline, reducing reliance on Gulf shipping corridors.
Alongside these exposures, our defensive allocation to USTs remains a core component of portfolio construction. While geopolitical shocks initially push inflation expectations higher through energy prices, sustained uncertainty often leads to slower global growth and a flight to high quality liquid assets. Positions across the five-, ten- and thirty-year segments of the US Treasury curve therefore provide both liquidity and potential capital appreciation should global risk aversion intensify.
In periods of heightened geopolitical uncertainty, our investment process remains disciplined and defensive. At times such as these, we continue to adhere closely to our established process, selectively rotating out of relative outperformers and redeploying capital into underperforming bonds and more defensive positions where valuations are becoming increasingly attractive. Bond prices are anchored by the long-term “too strategic to fail” nature of the issuers, providing an additional layer of structural support. By maintaining exposure to the sovereign balance sheets, infrastructure assets and commodity supply chains that underpin global trade, from Gulf and Mexican energy producers to Latin American utilities and metals exporters, the portfolio remains positioned to navigate the current environment while prioritising capital preservation and long term resilience.
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