Market update: Geopolitical developments and PruFund positioning

Market reaction to recent events 

The escalation in the U.S.–Iran conflict this week has reshaped market dynamics, with the most immediate pressure coming from the freeze in shipping through the Strait of Hormuz. Tanker movements slowed sharply after Iranian warnings, disrupting a corridor that ordinarily carries a significant share of global seaborne oil and liquified natural gas. At the same time, the situation has been complicated by Iranian attacks and attempted strikes across Gulf region energy infrastructure, raising operational risks for producers and transport routes. Despite these challenges, markets appear to be adjusting quickly to the new environment.

Oil prices have risen meaningfully in response, with Brent climbing into the mid $80s as traders priced the likelihood of more prolonged interruptions to regional flows. European natural gas prices have also surged this week, reflecting heightened concern over energy security; however, despite the sharp move, they remain far below the extreme levels witnessed at the onset of the Russian invasion of Ukraine and have merely returned to the more typical range seen at the beginning of 2025. Even though energy infrastructure has not suffered widespread permanent damage, the combination of disrupted logistics, heightened security risks, and targeted regional attacks has reinforced expectations that energy costs may stay elevated for longer than previously assumed.

Bond markets reflected these inflation concerns through higher yields across major developed economies. U.S. Treasury yields extended their recent rise as investors reassessed the balance between elevated energy prices and safe haven demand. However, it should be noted that the moves have only taken us back to the start of year level. European yields also moved higher, with curves steepening as markets weighed the possibility that central banks may postpone or slow expected rate cutting cycles if the energy driven price pressures persist. Policymakers remain cautious about repeating past misjudgements on inflation persistence, and recent commentary suggests they may maintain a lower bar for policy action should sustained price pressures emerge. Nonetheless, markets continue to view rate setting decisions as highly sensitive to developments in the conflict, leaving room for a more constructive bond backdrop if tensions ease.

Equity markets experienced a broad sell off early in the week, but importantly, much of the weakness represented a pullback from strong year to date gains rather than a deterioration in fundamentals. Several markets that had rallied sharply this year—such as Korea’s KOSPI—saw more exaggerated moves, but these adjustments help reset positioning and may create a healthier foundation for future advances. Even as volatility spiked, some major indices remained within a few percentage points of recent highs, underscoring underlying resilience despite geopolitical stress.

What this means for PruFund?

Our broad global diversification means different asset classes have reacted in varied ways to current market conditions. Equity positions have seen-short term pressure, which is consistent with historical market behaviour in periods of geopolitical stress. In contrast, our diversified allocations – including exposure to private markets, real assets and selected credit – continue to add resilience across the portfolios.

PruFund’s long-established smoothing mechanism remains a key strength and is operating as intended. By dampening the effect of sharp market movements, it helps protect investors from short-term volatility while staying aligned with long-term expected returns.

“Geopolitical shocks inevitably create short term volatility, but we’ve seen similar periods many times before. In this environment, equities have come under pressure, but other parts of the portfolio, such as diversifying assets and real assets, have responded differently, reflecting the value of broad diversification. We also run a number of scenarios when setting the Strategic Asset Allocation, including a geopolitical escalation so as to create a more resilient portfolio and avoid the worst shocks in these situations. This, together with our established smoothing mechanism helps to dampen the impact of sharp movements and keep clients focused on their long term expectations.”

Parit Jakhria, Director of Long-Term Investment Strategy, Life Investment Office

We have a long history of navigating geopolitical events – from the 2011 Arab Spring to more recent episodes, demonstrating that short-term volatility typically does not derail long-term outcomes for well-diversified, multi-asset portfolios. 

Our investment approach and outlook

We very much believe in one past, many futures and have a detailed set of scenario pathways that consider productivity, inflation, fiscal, geopolitical, trade and climate shocks amongst other factors. The intention of our process is to come up with an asset allocation that is mindful of a range of plausible scenarios, whilst trying to achieve a good risk and return in the median scenario. In particular, we have considered geo-political escalation scenarios including escalations around the middle east and we expect the portfolios to remain relatively resilient to moderate geopolitical shocks, as evidenced in 2022.

While oil markets remain sensitive in the near term, the overall market reaction has been measured. Historical patterns show that risk assets often recover within weeks following comparable shocks unless conflict widens materially. Bond markets have seen modest safe-haven flows, while currency moves remain within normal historical ranges for this type of event. However global markets will remain exposed to more extreme escalations, and this is something we shall continue to monitor, and make adjustments as required.

Past performance isn’t a guide to future performance.

Our investment team continue to monitor:

• Duration and scope of US/Israel operations 
• Implications for global oil supply and LNG supply chains 
• Inflation dynamics and expectations for monetary policy 
• Any signs of broader regional escalation or the conflict becoming more protracted 

Scenario analysis indicates that even a temporary spike towards USD 100/bbl, would likely have a manageable, though meaningful impact on global growth and inflation, with effects expected to be temporary. More moderate outcomes would imply smaller, short-lived macroeconomic effects.

Overall, we believe PruFund portfolios remain resilient, well-diversified and appropriately positioned to navigate this period of heightened uncertainty.

Please note that the value of an investment can go down as well up and your client may get back less than they have originally invested.

We know many of you will be having challenging conversations with clients today. If you need further guidance, supporting materials or deeper analysis, please reach out to your usual PruFund account manager.