Historically, US equities have demonstrated strong performance following significant conflicts. However, DBS asserts that the current Middle East conflict may not follow this trend, warning investors against complacency in this situation.
The war in Iran, now in its third week, has resulted in thousands of casualties with no definitive end in sight. DBS advises investors to exercise caution and avoid putting too much stock in historical trends concerning American equities.
DBS states, “While history may suggest that US equities often yield positive returns after major conflicts, complacency is not advisable given the current Middle East conflict.”
As the conflict continues to unfold, DBS encourages investors to implement risk management strategies in their portfolio construction. This could involve increasing their exposure to gold and partially substituting US equity exposure with the S&P 500 Low Volatility Index.
DBS has identified three themes they believe will heavily influence narratives in the second quarter of 2026.
Firstly, oil continues to be a significant factor due to the ongoing military crisis in the Middle East, especially considering Iran’s role as the fourth largest OPEC producer. Rising energy prices could pose problems for risk assets.
Secondly, the policy stance of Kevin Warsh, the nominee for Fed chair, indicates a potential reset with an increased likelihood for “renewed quantitative tightening,” which could lead to a steepening of the yield curve.
Finally, diversification beyond crowded trades is encouraged, with recent profit-taking seen as “transitory.” A “return to fundamentals” is expected, with a focus on pre-crisis themes like precious metals and technology. These are driven by “dollar debasement” and “AI supremacy”, respectively.
In terms of diversification, DBS suggests investors consider increasing their exposure to emerging markets (EM) and Japanese equities. EM equities are likely to benefit from Fed rate cuts, dollar weakness, robust earnings growth, and light positioning. Conversely, Japanese equities are set to gain from fiscal stimulus, governance reforms, and an attractive yield gap.
DBS concludes, “Global markets are currently navigating through an unusual convergence of geopolitical challenges and technological opportunities. The paradoxical nature of this situation reflects the complex yet potentially rewarding market conditions investors are currently navigating—an era where traditional strategies may no longer apply.”
What is the advice from DBS regarding the current Middle East conflict?
DBS advises investors not to rely excessively on the historical trends of stock market performances following major conflicts, warning that complacency is unwarranted in this instance.
What are the three themes DBS identified for Q2 2026?
The three themes are the role of oil in the military crisis in the Middle East, the potential policy reset implied by Fed Chair nominee Kevin Warsh, and the need for diversification beyond crowded trades.
What are DBS’s recommendations for diversification?
DBS suggests investors consider increasing their exposure to emerging markets and Japanese equities, which are set to benefit from several factors including Fed rate cuts, dollar weakness, robust earnings growth, light positioning, fiscal stimulus, and governance reforms.
