Middle East Crisis: Contained Disruption, Not a Structural Shift

Our base case is that the current surge in energy prices reflects a temporary passing supply constraint, rather than a lasting supply shock. While uncertainty remains elevated, several factors argue against a structurally higher oil or gas cost curve.

The conflict is constrained – Iran’s ability to sustain a prolonged military escalation appears limited, given finite missile stockpiles, degraded command and control capabilities, and the overwhelming military dominance of Israel and the U.S. Past episodes – notably the 1988 Tanker War and the June 2025 Israel-Iran conflict – suggest that, once Iran’s ability to impose costs diminishes, pressure builds quickly for de-escalation rather than escalation.

A prolonged closure of the Strait of Hormuz remains unlikely – A sustained shutdown would impose outsized costs on Iran and create strong incentives for external intervention. The U.S. has the capacity and precedent to escort commercial shipping, while China also has a strong interest in avoiding prolonged disruption, given that around 50% of its oil imports transit the Strait⁴.

The oil market entered this shock with buffers – The market was already expected to be in a surplus in 2026 (c. 3.8 million barrels per day (mb/d)), with global inventories at 477 million barrels, surpassing its five-year average for the first time since 2021. OPEC spare capacity is estimated at 3.9 mb/d⁵. Strategic and commercial reserves – including around 1.2 billion barrels held by China⁶ – provide a meaningful cushion against short lived disruptions.

Energy prices may remain volatile in the near-term, but accounting for these mitigating factors, we currently see it as unlikely that oil and LNG prices reset structurally higher. More severe outcomes involving sustained infrastructure damage or prolonged transit disruptions remain non-base case scenarios, discussed below.

Markets have priced out around 15 bps of rate cuts in the U.S. for 2026 and are now assigning a non-zero probability of rate hikes in Europe⁸. Despite this, we do not believe the current commodity shock is sufficient to alter central bank policy paths. Oil price shocks tend to have a limited and short lived impact on core inflation, particularly given that the U.S. and Europe are structurally less oil intensive than in past decades.

Today, a 10% increase in oil prices leading to a supply shock would, all else equal, lift core CPI across the U.S. and Europe by roughly 5 bps over the following quarter (Exhibit 5)⁹. In other words, the bar for oil prices to materially shift the policy trajectory is high. While policymakers dialogue and tone may shift at the margin, we believe it would require a sustained surge in energy prices – one where inflation expectations become unanchored – before policymakers would be unable to look through the move. For now, market-based inflation expectations remain broadly anchored at around 2%, consistent with central bank targets.¹⁰

The more meaningful risk, in our view, would be through consumer sentiment and the potential knock-on effect that may have on consumption, should higher energy prices persist. In such a scenario, energy costs would act as a “consumption tax,” weighing on growth and ultimately arguing for more easing, not less.

That said, under our base case, our rate expectations remain unchanged. For the Fed, we continue to expect 50 bps of rate cuts in 2026. For the ECB, we see scope for 0-25 bps of cuts in 2026, with our view adjusted modestly from earlier expectations, reflecting improved growth momentum from German fiscal stimulus rather than developments related to the Middle East.

Looking beyond near term volatility, history suggests that markets tend to look through geopolitical driven energy shocks. Past episodes of sizable¹¹ oil price moves have typically been followed by stabilization and recovery in equity markets over subsequent months. Indeed, the median returns for the S&P 500 over the subsequent one- and three-month periods have both been positive (Exhibit 6)¹².

Taken together, recent developments reinforce our view that near term uncertainty does not derail the broader macro backdrop or our long-term investment themes, and that disciplined, forward looking positioning remains appropriate.

Across our platform, we see limited direct impact from recent developments in the Middle East. Our exposure to the region is minimal – approximately 0.15% of AuM, de minimis across our private equity and infrastructure portfolios – and we do not expect the current situation to have a material direct effect on portfolio companies at this stage. Within our private equity directs portfolios, ten companies have some activities in the Middle East. However, for these companies the region represents less than 5% of EBITDA on average, resulting in indirect EBITDA exposure to the region of less than 0.75% across our portfolio.

More broadly, private markets remain well positioned to navigate near-term volatility. Valuation gaps relative to public markets are at their widest levels in 15 years, leverage remains at historical lows outside of the Global Financial Crisis and borrowing costs have retraced 80% from post COVID peaks¹³. As a result, exit activity and exit premiums are recovering, distributions are increasing, and capital markets activity is expected to rebound further, pointing to greater exit activity ahead. Against this backdrop, and given our unchanged macro and rates outlook, we remain constructive on private markets and do not see recent geopolitical events altering the medium-term investment opportunity set.

Recent developments further reinforce several of our key long-term investment themes, most notably the importance of secure, affordable, and resilient energy infrastructure, as well as a sustained increase in defense spending across the U.S., Europe, and Asia.

The current conflict in the Middle East highlights the fragility of global energy chokepoints, strengthening governments’ focus on mission critical energy infrastructure, including grid resilience, energy security, and diversification of supply – areas where our infrastructure platform is actively invested. At the same time, defense is emerging as a multi-year investment theme, driven by heightened geopolitical tensions, rising military budgets across NATO and its allies and APAC economies, and increased focus on technological modernization. We highlighted the breadth of private markets opportunities in aerospace and defense in our Q1 2026 Private Markets Chartbook, and recent events are likely to further reinforce long-erm investment demand in this space.