The latest dose of global instability – following the US and Israel’s decision to attack Iran – is eliciting the same responses from asset owners as they voiced after the Trump administration’s tariff policy almost a year ago, or when Russia invaded Ukraine in 2022: they are long-term investors and have built resilient, diversified portfolios to withstand these kinds of crises.
Asset owners in the region in Abu Dhabi, like $1.1 trillion ADIA, Riyadh, home to $925 billion Public Investment Fund Corporation and Doha-based Qatar Investment Authority, have prioritised ensuring the safety of their staff and curtailed business travel. Whether conflict at home means they deploy more capital domestically, remains to be seen.
Outside the region, asset owners like $392.2 billion CalSTRS have publicly reflected on the importance of liquidity and the value of a neutral position to their asset allocation. Similarly in Europe, pension funds Top1000funds.com spoke to are keeping a close eye on the situation, but not changing course.
“We haven’t changed the allocation in response to the conflict in the Middle East. There is too much noise and it’s hard to find an edge. With hindsight, you could think ‘why didn’t we buy oil or natural gas?’ but we don’t try to predict things,” reflected Michael Flycht, deputy chief investment officer at Denmark’s PKA.
Why hasn’t the market reacted?
At the time of writing, investors have also shared their surprise that apart from the rise in oil prices, the wider market hasn’t really reacted.
“I think we’re all somewhat shocked that there hasn’t been more market movement, but we have to know that the market is pricing efficiently what it knows. There is a lot of uncertainty here that the market can’t really price in,” said Scott Chan, chief investment officer of CalSTRS, speaking at the March board meeting.
One explanation could be a market assumption that Trump “will change course if the effect on the oil price becomes too great,” suggests Peter Verbaken, head of liquid commodities at Dutch asset manager APG.
“If this lasts another two weeks, you will lose so much supply that the oil price will really rise again, that’s almost inevitable. The effect of this conflict on the oil market cannot be overestimated. In my view, the impact on the price really should be even greater. The fact that this is not the case has to do with the fact that investors have become accustomed to Trump backtracking if the impact becomes too great.”
Other investors like the chief investment officer of Australia’s Queensland state sovereign funds QIC, Allison Hill, have adopted a wait-and-see approach.
“It’s really too hard to say whether this conflict will last. I think President Trump is saying it’s going to be a three or four-week campaign. Hopefully if it is relatively constrained, markets may look through this, but we are going to be watching market reactions, but at this stage, no changes to the portfolio,” she told Top1000funds.com in early March.
Dan Mikulskis, chief investment officer of People’s Pension urged the UK’s largest asset owners (eight of which now control around £500 billion in assets) to follow a clear set of principles rather than react to events as they unfold.
“We’ve seen it many times before that the biggest risk can be over-reacting to the noise in global markets. A useful starting point in times like these is that the consensus is probably right and has probably already been priced in by the markets. It helps to have some humility.”
Speaking at the Pensions UK investment conference in Edinburgh, he stressed the importance of leaning into principles, beliefs, and repeatable processes that can be applied to key investment decisions an organisation faces, he said the challenge for asset owners isn’t about where the price of oil will be next week or what happens to next month’s employment numbers.
“It’s about the process and steps you put around it all to reach a solution you can act on.”
Impact on Asia
Asia is set to feel the impact of the energy crisis more than other regions.
The US Energy Information Administration reports that 84 per cent of crude oil and 83 per cent of LNG that moved through the Strait of Hormuz in 2024 went to Asian markets, with China, India, Japan and South Korea accounting for 69 per cent.
Temasek chief executive Dilhan Pillay Sandrasegara has been on the record saying Asian countries have had to live with worries around oil for a long time, and he says some parts of the portfolio will inevitably be impacted by the oil price spike, such as airlines and power generation companies.
“But the bulk of our portfolio is not [exposed to the risk], it’s quite inoculated from the impact of oil prices,” he said at a Bloomberg Invest conference early March.
“Obviously for the financial services sector, it’s a proxy to the broader economy, so that part of it gets impacted. But we’ve got a fairly balanced portfolio.”
CalSTRS’ Chan is also mindful of the impact on Asian economies. In one approach, he is looking at nations that are net importers of oil as potential areas for investment. For example, South Korea’s KOSPI index fell 12 per cent in a record single-day decline in early March.
“If that falls 40 or 50 per cent it might be interesting for us to diversify the portfolio more geographically, by buying some of those equities,” he said, adding: “Right now with the uncertainty, I don’t care who you talk to, if they tell you they know what’s going to happen, you should probably walk the other way.”
Preparing for an inflation spiral
Despite investors’ focus on the long term, under the hood, powerful forces unleashed by the conflict are already beginning to have an impact.
An inflationary spiral triggered by higher energy prices and choked off supply chains is front of mind at the World Economic Forum.
In a recent note it warns of ripple effects that will stretch from Gulf energy-dependent steel mills in South Korea to semiconductor fabs in Taiwan and farms needing fertiliser in Brazil. The price for urea, the most popular synthetic nitrogen fertiliser, has increased by about 30 per cent over the past month, while soybean oil prices hit their highest level in more than two years.
“First it hits oil, gas, shipping and aviation; then inflation, industrial costs and food security; and eventually trade routes, investment decisions and political stability,” predicts WEF.
One way to hedge against inflation is to invest in natural resources in a diversified portfolio but many investors have less allocated to fossil fuels. It’s the subject of a research note by Dan Connell, managing director, co-head of real assets and sustainability at Commonfund, which provides outsourced CIO services to non-profits.
Twenty years ago, the impact of inflation might have been supported by investors having a combination of exposure to the traditional energy economy through public indices like the S&P 500 and allocations to natural supply shock hedges like private natural resources.
But energy’s share of the S&P 500 has declined from 16 per cent in 2008 to just 3.5 per cent of the index today so this public exposure in institutional portfolios is less material and is consequently “less helpful as an indirect hedge,” says Connell.
Yet this month alone, oil groups are predicted to generate billions of extra cash flow following the rise in oil prices.
Meanwhile, Connell argues private market allocations to traditional natural resources have also fallen significantly, with many institutional investors de-emphasising this exposure with consequences that could now be detrimental in an inflationary environment.
“Some investors adopted the perspective that construction of private portfolios needs only concern itself with absolute return potential – and not the sources of that return. In the first half of the last decade, that thesis has been tested and found wanting with natural resources returns outpacing other segments of private markets in the early 2020s as inflationary pressure and higher interest rates returned for the first time since the 2000s.”
APG’s Verbaken also argues that Europe appears relatively sheltered from the impact of high energy prices compared to when the supply of Russian gas fell away because the continent is heading into the summer. The International Energy Agency (IEA) has also released strategic reserves.
A catalyst for long term change?
Other opportunities could lie in the crisis triggering long-term change.
WEF argues that historically, every major oil shock has generated a policy response proportional to the pain it inflicts. The 1973 oil embargo accelerated France’s now formidable nuclear program, and the 1979 Iranian Revolution drove Japan’s aggressive energy-efficiency push.
“The current crisis, which simultaneously exposes Asia’s dependence on oil and LNG imports and the fragility of fertilizer supply chains (and of food security generally), may prove to be a powerful accelerant for diversification, redundancy and stockpiling. But structural adjustment takes years. In the interim, the damage is accruing,” it says.
