A surge in energy prices driven by the escalating Middle East conflict is feeding into inflation expectations and altering the outlook for interest rates, with the implications extending across global markets and into South Africa.
Insights shared during a Schroders update hosted by its investment and economics team this week suggest the disruption is no longer being treated as temporary, with structural supply constraints increasing the risk of stagflation and complicating the policy path for central banks – including the South African Reserve Bank.
At the centre of this shift is the scale of disruption in energy markets. Malcolm Melville, portfolio manager in the commodities and emerging market debt team at Schroders, described a situation where the supply of oil and gas has been materially constrained. The effective closure of the Strait of Hormuz – a critical artery for global oil flows – has removed about 10 million barrels per day from the global oil market, while attacks on Qatari infrastructure have cut liquefied natural gas (LNG) capacity by as much as 70%, with repairs expected to take three to five years
This distinction between oil and gas is critical. Oil production may recover within months once transport routes reopen, but gas infrastructure damage introduces a far more persistent constraint. As Melville noted, even if the conflict ends, “we’re going to have less global gas supply… and therefore that probably means higher gas prices”.
Pricing dynamics already reflect this tightening. US benchmark crude (WTI) has risen from about $60 to near $100 per barrel, while Brent crude has moved above $100 to $105. Closer to the conflict, Middle Eastern benchmarks have surged to roughly $150 per barrel equivalent, highlighting how proximity to disrupted supply chains is driving regional price divergence.
Yet it is not crude itself that transmits inflation through economies, but refined products. On that front, fuel prices have already returned to levels last seen during the Ukraine crisis, suggesting that the inflationary impulse is still working its way through the system.
Compounding the pressure is a developing global bidding war for energy. Europe, which pivoted heavily towards LNG after Russia’s invasion of Ukraine in 2022, now finds itself competing directly with Asia for supply. Cargoes destined for Europe are increasingly being diverted mid-journey as Asian buyers outbid them, effectively turning the market into a real-time auction for scarce energy resources.
For economists, this shift has immediate implications. David Rees, head of global economics at Schroders, noted that oil prices above $100 per barrel are sufficient to add about one percentage point to headline inflation, pushing economies into what he described as a “genuine inflation squeeze”.
He added that disruptions to fertiliser exports from the Gulf could trigger a further wave of food inflation with a lag of nine to 12 months, potentially extending price pressures into 2027, reinforcing the risk of a stagflationary outcome where inflation rises alongside weakening growth.
Central banks: from rate cuts to ‘wait and see’
Interest rate expectations have repriced sharply. Markets that entered the year anticipating rate cuts have shifted towards pricing in hikes.
Rees indicated that this adjustment may be overstated. Although markets have moved quickly, central banks have taken a more measured approach. Apart from isolated cases such as Australia’s recent 25 basis point increase, most policymakers have held rates steady and emphasised flexibility as the situation evolves
This stance reflects the experience of 2022, when central banks were criticised for reacting too slowly to the inflation shock following Russia’s invasion of Ukraine. Policymakers are now more sensitive to the risk of falling behind the curve, while also recognising the risk of tightening prematurely into a supply-driven shock.
Current communication from central banks reflects a focus on whether higher energy prices translate into broader inflation pressures, particularly through wages and core inflation.
Regional dynamics remain uneven. The US, supported by relatively strong growth and its position as a net energy exporter, appears more insulated, although core inflation remains about 3%. Europe faces greater vulnerability, with energy supply disruptions weighing on growth and industrial activity.
South Africa is directly exposed to higher fuel costs. Schroders estimates that petrol prices could rise by as much as R5.20 per litre – a 26% month-on-month increase – with fuel accounting for approximately 4% to 4.5% of the CPI basket
In this environment, Schroders predicts, the SARB is expected to keep rates unchanged, with the duration of the energy shock influencing the policy path.
Multi-asset positioning: resilience over reaction
Portfolio positioning reflects increased uncertainty around both inflation and growth.
Tara Fitzpatrick, a portfolio manager in Schroders’ multi-asset team, noted that markets appear to be pricing a relatively short-lived disruption, while the potential for infrastructure damage introduces a more persistent risk to both inflation and growth
Fitzpatrick said portfolio positioning reflects these dynamics, with allocations adjusted as the outlook for inflation and growth evolves.
Bonds are under pressure as inflation expectations rise, while tight credit spreads provide limited compensation for downside risks.
Gold, despite its role as a geopolitical hedge, is facing headwinds from rising real yields, which increase the opportunity cost of holding non-yielding assets.
Gold: from safe haven to question mark
Gold remains a key consideration for South African investors, given its role in previous periods of commodity strength and its contribution to export performance.
However, current dynamics are more complex. Although geopolitical risk typically supports gold, rising interest rate expectations are acting as a counterbalance. Higher real yields increase the opportunity cost of holding gold, limiting its upside.
Fitzpatrick noted that gold has performed well as a hedge against geopolitical and fiscal risks, but its role becomes less clear in an environment where interest rates are rising rather than falling. This places gold in a more constrained position than in previous crises, despite continued uncertainty.
Investor behaviour: avoid overreacting to volatility
Duncan Lamont, head of strategic research at Schroders, highlighted the tendency for investors to react to short-term market movements rather than underlying fundamentals.
Volatility has increased significantly, with the VIX rising by as much as 70% to 80% since the start of the year. Historical analysis shows that reducing exposure during periods of heightened volatility can materially reduce long-term returns
Even in stagflationary environments, equity outcomes have varied. Returns have generally been lower, but not consistently negative, and equities have often outperformed cash and inflation over longer periods.
Lamont emphasised the importance of maintaining a long-term approach in uncertain environments.
Fixed income and real assets: stress points and opportunities
Fixed-income markets have adjusted rapidly to the shift in inflation expectations.
James Ringo, portfolio manager in Schroders’ global unconstrained fixed income team, described a significant change in market narrative, with inflation concerns replacing expectations of a stable environment
Pricing has focused primarily on inflation, while the impact on growth is less fully reflected in credit markets. This creates potential for further adjustment if growth weakens.
Ringo said the shift in inflation expectations has required a more defensive approach, particularly as markets reassess both inflation and growth risks.
At the same time, divergence in regional rate expectations is creating relative value opportunities.
In real assets, Tom Walker, co-head of global listed real assets at Schroders, highlighted increasing dispersion across sectors. Walker said outcomes are becoming increasingly sector-specific, with performance driven by income structure and balance sheet strength.
The scale of interest rate increases remains a key factor in determining outcomes across the sector.
Portfolio positioning: how Schroders is responding
Across asset classes, Schroders’ positioning reflects a shift towards caution, selectivity and flexibility in response to the evolving energy shock and inflation outlook.
In commodities, Melville indicated that portfolios retain exposure to higher energy prices through call options, with positions extended further along the curve. This reflects a view that longer-dated prices are not fully capturing the structural supply constraints emerging in energy markets
Within multi-asset portfolios, Fitzpatrick said allocations remain overweight equities, but with a reallocation towards the US, where the economy is less exposed to energy supply disruptions. Commodity exposure has been trimmed following recent price increases, while bonds are being approached more cautiously as inflation risks rise.
In fixed income, Ringo said portfolios are positioned defensively, with a preference for higher-quality assets such as covered bonds and mortgage-backed securities. He noted that exposure to interest rate risk in Europe has been reduced after recent market moves, while maintaining flexibility to increase credit exposure if valuations adjust. Ringo added that divergence in rate expectations across regions is creating opportunities to express relative value views across government bond markets
In real assets, Walker said positioning has increasingly favoured assets with long-duration, inflation-linked income streams and lower leverage. Exposure to more economically sensitive sectors remains limited, reflecting the potential impact of slower growth and higher financing costs.
Across these strategies, Schroders noted that its portfolio adjustments have been incremental rather than reactive, with an emphasis on maintaining diversification while responding to changing inflation dynamics and policy expectations.
Disclaimer: This article is a general summary of the presentation and does not constitute financial or investment advice. Investors should consult their financial adviser for advice tailored to their personal circumstances.
