Schroders: global economic prospects hinge on Iran war
The world’s geopolitical instability has upset earlier forecasts of economic growth, a Schroders market analysis has observed.
The change has fundamentally altered monetary expectations, with investors now bracing for potential interest rate hikes rather than the cuts anticipated at the start of the year.
In response, the firm has downgraded its equity view to neutral, citing expensive valuations and the yet-to-be-realised impact of soaring energy costs on corporate earnings.
The analysis by Schroder’s UK-based wealth management firm, Cazenove Capital, is contained in its May 2026 “Market Update and Economic Outlook”, released during the recent Schroders Bermuda Investment Seminar 2026.
The author, Cazenove’s chief investment officer Caspar Rock, warns that global economic prospects now hinge primarily on the ongoing Iran conflict and suggests that the “regime shifts” occurring are rewriting the traditional rules of investment.
As the conflict in the Middle East escalated in the first quarter of the year, a sharp sell-off occurred across global equities and bonds.
The report explores various future scenarios for the global economy, ranging from market de-escalation to a severe inflation shock if trade routes remain closed.
Cazenove remains underweight in fixed income, noting that equities and bonds are increasingly moving in lockstep, which reduces the traditional protection bonds provide.
Despite headwinds, the report highlights positive growth drivers, such as a resilient US economy supported by solid consumer spending and healthy household balance sheets
The report also notes current data refutes narratives that AI is destroying jobs; instead, occupations exposed to AI have shown steady employment levels since the launch of OpenAI’s ChatGPT.
Strategically, the firm is increasing its position in cash and alternatives, including gold and absolute return strategies, to improve diversification.
Ultimately, Schroders emphasises that while geopolitics will remain a source of short-term noise, the medium-term strategy should focus on staying invested.
The report concludes that “volatility breeds opportunity,” urging investors to adapt to the new regime rather than attempt to predict the unpredictable.
It adds that the past year delivered strong returns, but recent geopolitical turmoil has reintroduced significant volatility to a market that had previously shown resilience.
Still, equities and bonds both remained positive over the past 12 months.
Market volatility was driven by the Iran conflict in the first quarter of this year, with the risk of sustained elevated oil prices weighing on investor confidence and triggering a market sell-off.
All sectors saw mostly significant declines in March except energy which strongly outperformed.
The report stated: “Consumer spending and capital expenditure in the US have stayed solid, and the country is well protected against a worldwide energy crisis.”
The implementation of tariffs may cause some major trading partners to be worse off, it said, and a result of the prolonged Iran conflict, uncertainty remains high, distorting economic data and reducing confidence.
The report questions whether or not AI-related spending is sustainable: “AI valuations have become increasingly elevated, and earnings expectations are increasingly hard to beat.”
• For more on Schroders/Cazenove Capital “Market Update and Economic Outlook” see Related Media
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