In my early days as a portfolio manager, I met a highly ranked Asia strategist. He had a large institutional following partly because he was the only Asian in a bulge-bracket firm as a regional strategist and his analysis was often data-backed rather than eloquent rhetorics of most of his Caucasian peers. I can still remember one of his punch lines “The most important quality of a good strategist is to stick to your views; eventually you will be right.” Unfortunately, as the CIO of the firm, I do not have that luxury. Strategists do not run portfolios; they just write and speaks well in front of an audience. When you are managing risk like several of my colleagues do, it is imperative to mark to market developments and adjust your portfolios accordingly if there is a need to.

We entered the year, Bubblicious, with these bullish contours. First, we expect growth to remain resilient driven by accommodative fiscal policies, AI capex boom as well as fading effect of Liberation Day tariffs. We judge the recent weakness in the labour market as a low-hire, low-fire environment similar to what we have witnessed in the early 1990s when PC and enterprise adoption accelerated that entailed both job displacement and creation but was accompanied by higher productivity.

Second, on inflation, we acknowledged that inflation will not fall back to central bankers’ comfort level due to stubborn service inflation and nascent increase in goods inflation. However, it does not derail the view that most central banks will remain accommodative even as we disagree with market consensus then for further cuts by the Fed.

Third, while high valuation can put a constrain on the magnitude of upside returns in equities, we argued wide-spread earnings growth across regions and sectors and more importantly, positive earning revision momentum will underpin constructive return profiles across many asset classes favouring equities over bonds though.

But like any strategist, there must always be a hedge to the call, and we caution we are in a mature bull market now running into its fourth year. There have been several instances since 1945 when the market corrects more than -15% even in an absence of a recession. Such episodes are rarely born of fundamentals alone. They are often the inevitable consequence of complacency and hubris following extended rallies. We noted that 2026 could well prove to be such a year.

But this regime has changed all thanks to US and Israel waging a war against Iran. Not quite the regime change President Trump was hoping for, but the more deleterious change in macro-environment regime that moved away from the Recovery phase we have anchored at the start of the year where growth is rising, and inflation stabilises to several other less constructive paths. We marked to market these developments, and we believe we will move into a macro regime of decelerating, but non-recessionary growth coupled with higher inflation, but not back to Covid levels. We do not dismiss the worst-case scenario of stagflation and that would simply come from the failure to restore up to half of the flows from the Middle East by end of May.

As we have laid out in our flash Navigator published shortly after the war, Dire Straits – Money for Nothing, there is enough oil inventory to sustain 2-3 months of the global economy needs. But what we did not realise, the same cannot be said of refined products, which have little excess inventory in part because there was no incentive to stockpile them given the continuous fall in prices prior to the war.

We refined our oil calculus. Before the war, the seven Gulf producers supplied 32.7mbd of molecules (25.4 mbd of crude, 2.8 mbd of condensate, 4.4 mbd of natural gas). As of writing, they have been forced to shut-in 12.3 mbd of production concentrated in 12.1 mbd of crude and condensate and 1.2mbd of natural gas. Assuming this is the peak of shut-in ie the war does not spill into a regional retaliation by the GCC, the total cuts in April would amount to 13 mbd. JP Morgan laid out the potential re-opening schedule in the table below. This underpins their oil price assumptions of $100bbl on average in 2Q26, $90/bbl in 3Q, and $80/bbl in 4Q. There are two other important takeaways from their analysis.

First, it will take at least 4 months for the world to refill their operating requirement after taking into consideration the commercial inventories available in the system. Poignantly, the last of oil tankers leaving the straits before the war reaches their port of destinations this week. Thereafter, draws on inventories and shut-ins will have to happen. Second, this means the up shot in downstream refined products prices will accelerate even further in the coming weeks. Moreover, the downstream refined products will take even longer to replenish and hence we should expect higher for longer prices for likes of diesel, jet fuel as well as petrochemical, plastic resin, and fertilizers (in which LNG is 60-70% of production cost). We are only at the beginning of cost-push inflation and demand destruction. Granted these are working assumptions and it could very well take longer and acknowledged there is non-linearity to the downside the longer the straits are constricted. But we need to work with something.