Tim Murray, Capital Market Strategist in the Multi-Asset Division at T. Rowe Price, shared his views on recent market volatility following the Middle East conflict.
Why have Asian equity markets suffered more than the U.S.?
The main economic transmission channel from the Middle East conflict is energy. Markets are focused less on direct trade disruption and more on the risk of sustained increases in oil and natural gas prices. That’s particularly important for Asia.
The U.S. is now a net energy producer, while most Asian economies are significant importers. Higher energy prices can support parts of the U.S. market, especially the energy sector, but they act as a drag on growth, margins, currencies, and current accounts across much of Asia. That creates a relative headwind for the region in a risk-off environment.
Positioning is also a factor. There has been a broad “sell U.S., buy Asia” rotation in recent months, leaving parts of Asia more crowded. Geopolitical shocks tend to unwind crowded trades quickly.
Finally, the U.S. market has greater exposure to defensive sectors like staples and utilities, which typically provide more resilience during periods of geopolitical stress.
What are the implications for inflation and interest rate policy?
The key inflation risk from the conflict runs through energy. Oil is arguably the single most important input into global inflation. It feeds directly into fuel and transportation costs, but it also indirectly impacts a wide range of manufactured goods and supply chains. A sustained rise in oil prices would likely push goods inflation higher fairly quickly.
In the U.S., that matters because recent progress on inflation has largely come from easing services pressures — particularly housing costs and wage growth. That has allowed markets to build expectations for gradual monetary easing.
However, energy-driven inflation is volatile and can shift the narrative quickly. If oil prices spike and goods inflation reaccelerates, it could complicate the Federal Reserve’s path. The Fed may need to remain more cautious than markets currently expect, potentially limiting the degree of rate cuts in the second half of 2026. In short, energy is the swing factor for the inflation outlook.
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Comments on the reaction of safe-haven assets
At least temporarily, traditional safe havens are not behaving as cleanly as they have in past geopolitical episodes.
Gold, in particular, has absorbed a significant amount of speculative capital over the past year. As a result, it has taken on some of the characteristics of a momentum-driven asset rather than a pure defensive hedge. When positioning is crowded, even safe-haven assets can see choppy price action.
The Japanese yen is facing its own domestic uncertainties. Ongoing questions around Japan’s fiscal trajectory and the future path of Bank of Japan policy have increased currency volatility, reducing its reliability as a straightforward risk-off hedge.
As for bonds, they remain an effective hedge against recession risk. But this conflict, if it transmits through higher energy prices, is more likely to raise inflation concerns than trigger an immediate growth collapse. In an inflation-driven shock, duration is not always the clean hedge investors expect.
How should investors consider adjusting portfolios in the event of a prolonged conflict?
That’s a more complicated question than usual. Investors are navigating an environment of unusually high uncertainty — not just geopolitically, but also structurally, given the rapid evolution of AI and shifting global policy frameworks. Traditional playbooks don’t feel as reliable.
Safe havens are relatively scarce, which makes diversification even more critical. Real assets, particularly commodities, can play an important role in a prolonged conflict scenario. They tend to act as effective inflation hedges and historically perform well during supply-driven shocks. At the same time, maintaining healthy allocations to bonds and cash is prudent in case higher energy prices ultimately tip economies toward slower growth or recession.
Within equities, we favor U.S. small-caps. They may underperform during acute risk-off episodes, but valuations are relatively attractive, revenues are more domestically oriented, and the U.S. economic cycle appears to be broadening. That backdrop could be supportive — provided the conflict does not evolve into a sustained oil-supply shock.
