Markets continued to climb during Feb despite headline risks, valuation concerns, and sharp sector corrections. Equity indices have maintained momentum on the back of strong corporate performance, but high-risk sectors such as software stocks, and cryptocurrencies have corrected sharply, revealing cracks in a rally that has lifted risk assets for the past few months. The big shock to the market occurred at the end of Feb when US started a bombing operation in Iran, leading to a spike in oil prices as the essential Straits of Hormuz, which account for 20% of oil shipping in the world was forced to close.
US Bombs Iran: The Energy Security Divide
The onset of military operations between the United States and Iran on February 28, 2026, has introduced a sharp divergence in global financial resilience. While the S&P 500 has largely shrugged off the initial volatility, supported by the U.S. position as a net energy exporter and strong corporate earnings, import-dependent regions in Asia and Europe have faced a far harsher reality. The surge in energy prices, with oil benchmarks surpassing $115 a barrel following disruptions in the Strait of Hormuz, has placed significant pressure on these economies.
This energy shock triggered record-breaking collapses in previously favored markets. The Nikkei 225 plummeted by over 4,200 points, roughly an 8% decline for the day, marking one of the largest single-day drops in its history, while South Korea’s KOSPI was forced to trigger circuit breakers during a record 12% intraday plunge.
The Stagflation Trap: Lessons from 1973 and 2022
A sudden spike in oil prices acts as a "double-edged sword" for the global economy, simultaneously driving up costs while stifling demand—a toxic combination that leads to stagflation. In the United States, because energy is a primary input for everything from manufacturing to logistics, a sustained breach of $120 a barrel could shave nearly 1.0% off GDP while pushing inflation well above 5%.
This scenario rhymes with the 1973 oil embargo, where prices quadrupled and the S&P 500 plummeted 16.1% as a wage-price spiral took hold. The 1973 oil embargo was a crisis where OPEC cut oil supplies to Western nations in retaliation for their support of Israel during the Yom Kippur War
We saw a more recent echo of this during the 2022 Russia-Ukraine conflict, when Brent crude surged toward $130 a barrel. The result was a brutal market correction for global markets where the S&P 500 falling nearly 20% in 2022, while the Nasdaq tumbled over 30% as rising energy costs forced central banks into aggressive rate hikes.
For today's investors, the risk is that central banks become trapped—unable to cut rates to support a slowing economy because they must instead combat energy-driven inflation. If the inflation accelerate, central banks may be forced to spike interest rates and this will lead to another collapse in the stock market.
The Escalation Matrix: From Volatility to Structural Risk
Whether the current conflict remains an event that has only short term impact on the global economy or evolves into a sustained economic crisis depends on three important factors.
First, if tensions persist beyond a few weeks, the risk-off posture becomes a self fulling prophecy, and the oil prices spikes with investors unsure when this crisis will end, leading to a downward pressure on the stock market.
Second, direct damage to key infrastructure—specifically oil production or refining facilities—would trigger a vertical spike in energy prices. This would not only crush corporate margins across the transport and manufacturing sectors but also reignite the inflation monster, forcing central banks to halt planned rate cuts and potentially strangling the current equity rally.
Finally, a full closure of the Strait of Hormuz represents the black swan scenario; a total blockage of this 20% global supply artery would likely result in an immediate 10–15% drawdown in global indices as markets price in a severe global recession. In this environment, there will be a rush from growth assets to defensive hedges like Gold and short duration bonds.
The current base case remains that the conflict stays contained and relatively short-lived: Iran retaliates but avoids a full escalation with the United States, while the U.S. seeks to limit the duration and economic fallout given political risks ahead of the mid-term election cycle. However, the narrative is becoming complex. Recent developments—including contradictory statements from the Trump administration suggesting the conflict could end in days or last up to five weeks—indicate a situation that remains fluid.
The key strategy in the face of such uncertainty is to remain diversified and make calculated, strategic entries into deeply sold-down sectors and countries that have a long-term AI and technology story. This approach allows us to capture opportunities even during periods of heightened risk. As the Chinese saying goes, “opportunities emerge from danger.”
Portfolio Performance & Positioning Strategy
The portfolio delivered a resilient performance in February. Cash returned +1.05% and the SRS with a return of +1.03% and CPF-OA posting a +0.76% return. The steady performance across the board was largely driven by the surge in Gold, alongside significant gains in China and India equities. A critical factor in the portfolio stability was the portfolio's high bond allocation, which acted as a vital buffer against the volatility triggered by the US-Iran conflict.
I’ve executed a tactical portfolio adjustment to take advantage of the current market correction triggered by the US–Iran conflict. The allocation has shifted from 50% equities / 50% bonds to 60% equities / 40% bonds.
The equity increase is directed mainly into Asia and Emerging Markets. These regions may face short-term volatility due to oil dependency, but the long-term fundamentals—especially in Technology and AI—remain strong. We also reduced USD bond exposure to mitigate the impact of a weakening USD while maintaining our Asian bond allocation.
India equities were trimmed because the newly switched in Emerging Market and Asian equity funds already carry substantial India exposure. This keeps our positioning in the Indian growth story without unnecessary concentration.
At present, the market is moving erratically, reacting on the news that are coming from the Middle East. While it is a good opportunity to enter the market, we remain prudent and prepared for the situation to take a turn for the worse, with a big buffer of bond allocation and focusing on sectors that has more attractive valuations and a good growth story.
[Download the fund factsheet for the month here]
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