What we discussed in April
Donough Kilmurray
Chief Investment Officer
As in March, the situation in Iran dominated our discussions. The Strait of Hormuz has now been closed for longer than expected and the risks of an energy crisis have increased. Two key questions were (1) given the level of supply disruption, why weren’t energy prices higher, and (2) why weren’t stock markets taking this risk more seriously?
First, as the blockades persisted through the month, we did see more impact on the oil price. Not just the immediate price, but also the futures prices for delivery later in the year. As Figure 1 shows, at the end of March markets were expecting oil prices to recede close to pre-war levels by December, but by the end of April, there were more sustained increases priced in for the rest of the year. This made sense to us, but with the largest reduction in global oil supply in history, why not higher prices?
Figure 1: Term structure of oil prices
Source: Bloomberg. Each dot represents the futures price of Brent oil (in US dollar) each month out to December.
One obvious answer was that markets still expect President Trump to back down or walk away from the situation before supplies get perilously low. His past behaviour would suggest this is still likely to happen. But even if the conflict ended now, the disruption and damage already caused mean it would take several months for energy markets to rebalance. The US and China still have oil reserves, as well as plenty of coal to burn, but we do see further upside risk to energy and related prices, such as fertilizer and other by-products, and more risk to the European economies.
As for stock markets, there was some justification for the continued strength, especially in the US. At current price expectations, the extra cost of energy for US consumers is still outweighed by last year’s OBBBA tax cuts1, although this is more the case at higher income levels than lower. Also, as the Q1 GDP report showed, there is the enormous growth in AI infrastructure development, which is related to the continued increases in earnings and earnings forecasts. Despite a few individual disappointments, the Q1 reporting season has shown no let-up in aggregate profit growth so far. As long as this continues, markets seem willing to look beyond the energy disruption.
Figure 2: World equity index price and earnings
Source: MSCI. World index price and earnings are in US dollars.
Although investor reaction to the war in Iran has been muted, markets have been distinguishing between the more resilient and more vulnerable regions. After leading the US last year and earlier this year, European and emerging market (EM) indices fell by more when Iran was attacked. This can be explained by the US having the stronger underlying economy and greater energy resources to withstand a supply crisis. However, when markets rallied on ceasefire news, Europe also lagged in the recovery. This can be explained by the technology sector, which has lead the recovery, and which forms a much larger part of US and EM indices than in Europe.
Given the increasing risk of longer disruption to energy supplies from the US-Iran stand-off, and the market’s re-ignited interest in the tech sector, we decided in April to reduce our tactical overweight to European equities. The question we debated was whether to reallocate the capital back to the world index, which is over 70% in the US, or to find another home for it. Despite the superior energy resilience, our long-standing concerns with the US index remain – the heightened concentration, stretched valuations and elevated earnings expectations – and we were reluctant to return the capital there. However, at the same time, we were wary of betting against the technology sector as it appears to be entering another phase of strength, and so we chose to rotate further towards emerging markets. See the next section for more details.
Figure 3: Regional equities before and during the Iran conflict
Source: MSCI. Price returns in euro.
An important issue with emerging markets (EM) that we discussed is their own growing concentration risk, driven by technology stocks, and the associated vulnerability to another market turn against AI, as we saw in late 2025 / early 2026. Both the EM and US indices contain roughly 32% in technology stocks, but one stock, the Taiwanese chipmaker TSMC, now makes up 13% of the EM index, compared with Nvidia being nearly 8% of the US index2. More broadly though, the top ten stocks make up 32% of the EM index, compared to 39% with the US index, so EM is slightly less concentrated in its biggest names. An important distinction is the type of tech stocks in each index. Whereas US technology companies are more software or services oriented, the EM technology companies are much more manufacturers of hardware, in particular semiconductors. While both sets of companies are highly profitable now, and both are vulnerable to a downturn in AI, the profitability of US companies is potentially more challenged by the AI boom than their hardware providers in Asia.
Lastly, clients will know that for some time we have been under-weight the US dollar in our portfolios, compared to global benchmarks. Where possible, we achieved this by under-weighting US equities in favour of other regions, and by switching some of our global equity index exposure (which is over 70% in dollars) into currency-hedged indices. This helped to soften the impact of the dollar depreciation last year, but the outlook for the currency has changed this year. First, after declining by about 12%, the dollar has cheapened. Second the fear that US policies had undermined it to the point that it could no longer act as a safe haven in a crisis was shown in March to be unfounded. Therefore, we decided to undo the switch from the global equity index to the currency-hedged index. Note that we are still under-weight the US dollar by being under-weight the US in our equity allocation. See the next section for more details.
1 OBBBA is the One Big Beautiful Bill Act, which contained tax cuts for households and businesses, as well as significant incentives for corporate investment.
2 Source: Bloomberg, MSCI, Standard & Poors, Financial Times.
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