Aviva Investors: Iran conflict and Hormuz disruption raise inflation and growth risks

Aviva Investors believes the duration of time that the Strait of Hormuz remains closed will be pivotal to the global growth outlook for the remainder of 2026.

Should we see a prolonged closure, the risks of higher inflation and weaker growth increase, with the prospects of monetary policy easing from the major central banks at risk of being abandoned, with some likely to raise rates, as they explain in their latest update released today and shown below:

Aviva Investors’ Investment Strategy team have revised down their central case for global growth to 2.75 per cent for 2026, down around 0.2 per cent from the start of the year. This is a result of rising energy prices, with the closure of the Strait of Hormuz blocking the flow of around 20 per cent of the global oil and LNG market, as well as the ongoing geopolitical uncertainty.

It is possible that the conflict ends soon and those risks quickly subside. The US has said it has made good progress in achieving its military goals and the Iranian regime has suffered a significant set-back and may be willing to negotiate in good faith. If this were to unfold, the team would retain a relatively optimistic outlook for a revival in global growth, albeit with higher inflation for a period. However, the team note there are a range of outcomes for the global economy, and that uncertainty could persist for many months, leaving visibility impaired and the global economy once again struggling to respond to a negative supply shock.

A key aspect will be the impact on headline inflation, with the predicted drag on growth primarily reflecting the inflationary impacts of higher energy prices. The team’s central scenario is that headline rates of inflation in 2026 are now expected to be around 1-1.25 percentage points higher than forecast at the start of the year. For the US, EZ and UK, this means inflation is now expected to rise this year, rather than fall, peaking around 3 per cent and only moving meaningfully back towards target in 2027.

With regards to interest rates, the team think it is reasonable for the increased probability of rate hikes to now feature in market pricing. It is expected that the ECB will raise rates this year, but that the Bank of England and Federal Reserve can still deliver some easing later in the year. But in considering the weighted probability that includes further upside risk to energy prices, they also see the potential for the BoE and Fed to remain on hold for an extended period or even raise rates this year.

In terms of asset allocation, the conflict in the Middle East and the uncertainty created has led the team to take a more cautious approach to their tactical asset allocation views. Overall risk assets such as equity indices, high yield corporate credit spreads and emerging markets have so far only experienced a relatively modest sell-off. Furthermore, industrial and materials sectors performed strongly in recent months, while tech lagged.

As a result of this broadening in market performance, the team remain overweight equities and believe earnings fundamentals support Emerging Market and Japanese equities, alongside the US, with Europe becoming less attractive. That said, since the start of the year the team have moderated their equity view on the balance of risks but remain overweight.

In terms of corporate credit, the team continue to see the risk-reward as unfavourable given that spreads remain relatively tight and both duration and spread risks have risen. The team therefore continue to prefer to be underweight. On government debt, the energy shock has offsetting effects on longer-dated duration, given the higher inflation and lower growth trajectory. Therefore, the investment team prefer to remain neutral but look for steeper bond curves on both long-term fiscal concerns and re-pricing of the front-end rates markets.

On currencies, while there continues to be a compelling medium-term case for USD depreciation, the conflict in the Middle East has introduced a powerful counter-cycle that has made the team more cautious and therefore looking for more idiosyncratic views, such as an overweight in the Australian dollar and selective EM currencies.

Michael Grady, head of investment strategy and chief economist at Aviva Investors, said:

“The conflict in Iran and the closure of the Strait of Hormuz have changed the global picture and reshaped the expectations for global growth, inflation and interest rates this year. There is now a high level of uncertainty across markets and a wide range of possible outcomes. As a result, a more cautious to tactical asset allocation is required at this time to ensure that portfolios are robust to that range of outcomes, while remaining agile in response to developments.”

The Aviva Investors quarterly House View represents the best collective judgement of Aviva Investors on the current and future investment environment, whilst explaining our thinking and reasons for our current economic views and investment decisions. The Q2 2026 House View and archive can be found here: https://www.avivainvestors.com/en-gb/views/house-view/