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A month into the second quarter of 2026 and we have a replay of 2025, where United States (US) President Donald Trump’s actions have disrupted world markets. On 28 February 2026, President Trump ordered an airstrike on Iran, which has thrown global markets into a tailspin. We believe that President Trump is continuing to play out a geopolitical chess game, but this time, he has underestimated his enemy.
Trump’s game
Almost exactly a year ago, President Trump sent the global economy into a panic with the announcement of blanket tariffs on all US trading partners. Following his “Liberation Day” announcement, global markets slumped. Seeing the result of that announcement, President Trump took a breath and directed a three-month pause to allow markets to calm down.
Using the same play, he went big and ordered an attack on Iran. Then, over the course of the war, he has made various threats, and when the markets start to swing wildly, he extends his deadlines – simply a variation of his tariff game.
President Trump always seems to adopt a plan B when things are not going to plan. This is important, because with the November mid-term elections coming up, he appears to be keenly aware of upsetting his voter base. He is therefore walking a tightrope of acting on aggressive policies, while trying to not upset the US consumer.
Trump’s underestimation
When President Trump went into Venezuela, the strikes on key infrastructure lasted 30 minutes, and within two hours, the leader of Venezuela was captured before a US-friendly leader was installed in his place.
Over the last few weeks, President Trump has seen that Iran is a lot more resilient and is not interested in rolling over for the US. In fact, it seems happy to kick the war-can down the road a little longer as it is in a position of power, given its ability to hold the Strait of Hormuz hostage and target the oil and gas infrastructure of its Gulf neighbours.
In addition, Trump underestimated his allies. After a year of bullying them with tariffs, when he needed their help, they all essentially said, “You picked this fight, now you sort it out.” For now, we believe this is very positive because it shows the escalation will be contained. Should more countries get involved on a military basis, the war could escalate which is a scenario we would like to avoid.
We must also remember that from an economic point of view, both the US and Iran need a solution as it is an expensive war for both sides. From Iran’s point of view, the country’s per capita income has halved over the last five years, which means the country needs to be open for business, and it can only do that if the war ends. The war cost the US roughly $11.3 billion in the first six days and every day that it continues, it costs an additional $1 billion.
The history of oil shocks
As we stand, the oil price has been hovering above $110/barrel, and the oil price, going forward, will depend on how long there is a disruption in supply. In other words when will ships be allowed to pass through the Strait of Hormuz again? Some analysts suggest that if the closure continues for many more months, the oil price could go up to $160/barrel.
To understand what the outlook may be, we can gain some valuable insights from the previous oil shocks over the last six decades:
1973 – 1974
The 1970s oil crisis, saw the oil price increase by four times. In today’s terms, that would be the equivalent of $300/barrel. The result of this was double-digit inflation, and aggressive interest rate hikes.
In the 70s the world was much more reliant on oil, and it needed a lot more oil to drive gross domestic product (GDP) growth. Today, in a world economy that is more service based, we need less oil to generate the same levels of GDP output. As such, we are fortunate to not currently find ourselves in this scenario. However, in the current global climate, we are more reliant on refined products like jet fuel, a lot of which comes from the Gulf.
Due to the world’s dependence on oil in the 70s, the oil shock saw global GDP fall from around 5% to 0.6%, which was significant. This was the first true global recession post the Second World War.
1979 – 1980
During the 1979 – 1980 Iranian Revolution, the oil price doubled, also resulting in double-digit inflation. At the time, the Carter administration appointed Paul Volcker as the Chairman of the Federal Reserve, in August 1979. Under his watch, US interest rates rose to an unprecedented peak of 22% in 1981. This “interest rate shock” pushed the US into its deepest recession since the great depression in the 1930s, but it was successful in bringing inflation down to 4% by 1983. Again, we do not think we are in this type of environment with the current Iran war.
This oil crisis saw global GDP fall by about 3%.
2007 – 2008
During the global financial crisis, the oil price spiked to $150/barrel, but unlike the other two oil shocks, this only resulted in a moderate increase in inflation. However, as the world was experiencing a significant financial crisis, rather than raise rates, central banks were lowering rates to try and stimulate their economies.
The 2008 recession was not a result of increased oil prices. Rather, it was the housing crisis which triggered the financial crisis.
2020 – 2023
Worldwide supply disruptions caused by COVID-19 and the Russia-Ukraine war, saw the oil price go as high as $120 a barrel. Again, there was a synchronised inflation wave and synchronised interest rate hikes, globally.
During this period, global GDP remained resilient because the shock of the war was felt regionally, impacting Europe more than other regions. So, while it raised global inflation, it did not knock GDP that much.
2026
At the start of 2026, the world was finally getting inflation under control and most central banks were entering rate-cutting cycles. Now, as oil has been hovering over $100/barrel for close on two months, inflation is expected to rise dramatically and we will see most central banks, if not raise rates, then put any cuts on hold. The US Fed is holding rates steady and will monitor inflation, with the likelihood of rate increases during the year and cuts only becoming a possibility in 2027.
This current oil shock and its effect, however, will depend on how long the war lasts and how high the oil price goes. At the moment, unfortunately, the answer seems to be longer and higher.
Peregrine Wealth’s scenario analysis
The mixed messaging flowing from leaders involved in the Iran war means nobody can predict what is going to happen. The various narratives are creating confusion as every player, especially President Trump, change their tone on a daily basis. When operating in an environment that is this volatile and uncertain, we can only think in terms of scenarios. The Peregrine Wealth team is working on three scenarios, and their likelihoods, when positioning for this conflict.
Scenario one: Stagflation lite – 65% probability
We call our first scenario, which has the highest probability, Stagflation lite. This is where we stand at the moment.
In this scenario, the Strait of Hormuz remains mostly closed, with limited traffic flow. Markets have priced in elevated war-risk premia. While it is not a total cut-off, it is enough to create a persistent energy and freight shock. Oil prices, at above $110/barrel, are reflecting this.
The impact on the global economy is highlighted by the fact that over 3,000 vessels have been locked behind the Strait of Hormuz and cannot move out of the Gulf. In addition, shipping costs from Oman to Singapore have increased sixfold from pre-war levels.
Assumptions:
- Shipping flows through the strait will be well below normal levels for several months.
- Oil and gas prices will remain materially higher during this period and for some time following the reopening of the strait.
- Freight and insurance rates will remain elevated.
- Europe and Asia will feel the brunt of this scenario, as they are the most reliant on Gulf oil and gas.
Second and third round effects:
- Elevated oil and gas prices will have an impact on inflation.
- This will put a squeeze on real incomes around the world as an increased oil price acts as a tax on business and consumers. It takes money that could have been spent elsewhere out of the system.
- Increased delivery costs for all traded goods because of higher freight costs and longer delivery times as ships will likely be rerouted around Cape Town.
- Central banks will become more hawkish on rising inflation and will be more cautious in their monetary policy stances.
- Given ongoing sticky inflation, interest rates will stay higher for longer, reducing both business performance and consumer spending.
In this environment, world growth will reduce by about 0.75% and global inflation will increase by around 1% above the base case.
We also believe that in this scenario, there will be very different regional impacts.
The US is self-sufficient when it comes to their oil supply. In fact, they are currently benefitting by exporting more oil to the rest of the world. Furthermore, their economy is proving to be extremely resilient given the CAPEX spending on technology and artificial intelligence, which is contributing significantly to the US’s GDP. This will not change because of an increase in the oil price. The US also benefits from higher productivity levels compared to its peers on the global stage.
Where the US will be hit is in the increase in the oil price. Gasoline prices in the US will go up dramatically, with the price already $4/gallon higher than pre-war levels. And this will increase the price of goods, which will increase inflation and, thereby, potentially interest rates.
The US does have a buffer in the high-income consumer base, however, which makes up 50% of US consumption. This segment will continue spending because they are less impacted by an increase in oil prices as they typically spend less on energy and fuel as a percentage of their wallet. However, lower income consumers will be hit hard by rising oil prices because a bigger proportion of their wallet goes towards the cost of transport and energy bills.
From a growth point of view, the US is not going to feel the impact of this war as intensely as other regions. In fact, at the March Federal Open Market Committee meeting, the Fed raised the US’s growth outlook, despite the current environment, given the non-correlated tailwinds for the US economy. But it also raised the inflation forecast. This means that while the US is more protected than other countries against the impact of the war, it will not be protected from rising inflation, given the oil price. As such, they probably won’t see any rate cuts in 2026.
Europe and China are going to be hit hard by this war given the extent to which they are exposed to the external supply of oil and gas. This means that any energy-intensive sectors will be under significant pressure.
China and Asia will feel the brunt of the impact as the largest share of their oil flows comes from the Middle East and we will likely see stronger fiscal support from those governments.
Scenario two: Full-blown stagflation – 35% probability
The Full-blown stagflation scenario will occur if there is a severe escalation of the war. This will result in major downward pressure on global growth and result in high, sticky inflation. The narrative is a period of complete disruption for months, that will trigger a global energy shock never seen before.
This will be a scenario of double-digit inflation, and it will be compounded by the rise in gas prices. Even after the war ends and the strait is open, prices will remain high, because it will require time to rebuild capacity. The oil and gas output from the Gulf will be diminished and oil prices will remain higher for much longer. The assumption is that flow through the Strait of Hormuz will remain at minimal levels, and while strategic stock will be released, it will not offset the shortfall.
The Full-blown stagflation scenario will disrupt the energy cycle for a much longer period before it and the world economy can return to normality.
Assumptions:
- Oil and gas prices spike to around $160/barrel.
- Freight rates and insurance move even higher.
- Increased risk sentiment induces a sell-off in financial markets with emerging markets feeling the brunt of this.
- Inflation moves to double digits and monetary policy tightens further with central banks increasing interest rates across the board.
Second and third round effects:
- Employment levels fall.
- Wage growth slows down or moves negative.
- Consumers stop spending because they are put under increased pressure.
- To boost economies, governments may turn to subsidies and price caps to keep inflation under control.
- Supply-side rationing for products like petrol, diesel, and gas.
- Gas rationing for power generation and industrial production.
Again, the US will feel this scenario less than other countries because of its growth dynamics. But it will experience an inflation shock which will start to impact consumers and pull the US growth well below capacity.
Europe, which is struggling to maintain 1% GDP growth, will struggle and definitely go into a recession. The region will likely also have to start rationing gas. The fortunate thing is that the northern hemisphere is heading towards summer, so demand will be lower for the next six months.
China and Asia will experience major energy and logistics disruptions and will require aggressive policy support from their governments.
It is in this environment that companies start making losses, and markets go into a significant sell-off, European and Asian markets will feel the pain more than the US.
Under this scenario, global growth will fall around 1.5% from the base case which, despite still growing marginally, will be considered a global recession. While the US economy may buoy global growth numbers, regions like Asia and Europe will create a drag. Inflation will rise to around 4% or 5%.
This scenario will play out should there be a severe escalation in the current conflict.
Scenario three: De-escalation <10% probability
The De-escalation scenario is obviously the scenario that investors and markets are hoping for. This is where we see an agreement and a negotiated settlement. This will reduce the risk premia being priced into markets. Shipping will normalise more rapidly through the Strait of Hormuz, along with freight costs. The assumption is that energy flow will stabilise, and oil and gas prices will show some relief.
However, given the current level of damage to the Gulf’s energy infrastructure, the impact of the war will be felt for many months after a ceasefire. If we had seen a de-escalation within the first few weeks of the war, we would have seen a short-term impact on financial markets, inflation and global economies. However, with the war having lingered for so long, and the destruction of key Gulf infrastructure like the gas fields and refineries, the transition from a war economy to being back on track will take at least a year, if not longer. The oil price will also remain higher for longer because of the damage to the supply chain.
Scenario three is the best outcome, but, even in this scenario, central banks will only be able to start cutting rates and providing liquidity into the markets at the back end of 2027, because of the extent of the infrastructure damage, which will delay recovery.
Once that happens, then risk appetite will improve and financial conditions will ease and, in time, the world’s growth can return to normal, or maybe even move a bit higher than the base case. But we believe that risk appetite is going to remain sticky until the energy supply chain is fixed. Only then will central banks start cutting rates.
The US economy will not be materially impacted should we see a De-escalation scenario. In fact, it is the scenario that President Trump would prefer. This is not a popular war, and he is facing the November mid-term elections, meaning he will want to make sure that he retains his supporter base.
A de-escalation will see confidence return to Europe and China, and those two regions will probably outperform the US in terms of, not economic growth, but markets, as their economies stabilise.
The damage is done
No matter what scenario plays out, the damage has been done. The various scenarios mean that the global economy is either caught between facing higher inflation and tighter monetary policy for 2026 only or it continues into 2027.
PEREGRINE WEALTH IS CALM UNDER PRESSURE
In scenarios like this, I always return to the four pillars of the Peregrine Wealth Investment Philosophy:
- The future is uncertain and will often surprise
- Asset allocation drives performance
- Diversification improves risk adjusted outcomes
- Valuation matters
This philosophy is designed to ensure that we will not overreact in situations like this, where the future has surprised, again.
Because of our disciplined adherence to this investment strategy, our clients can rest assured that all of our portfolios are diversified across different regions of the world and in different asset classes, which provide support in both risk-on and risk-off environments. No matter the cycle, Peregrine Wealth always ensures that it gets value built into the portfolios, and in tough times, having better quality, better value assets serve us well. While small cap and lower quality assets typically sell-off more in these environments, there is protection in good quality large-cap assets, diversification, and asset allocation. Our investments span many different asset classes that can add value in tough times.
Peregrine Wealth is disciplined when navigating challenging environments and we always plan for unexpected events. We never know if we are going to have a positive or negative cycle, but part of our strategy is to have the right tools.
This time is no different.