Markets are pricing in an ultimate end to the war and continued earnings strength, according to strategists at T. Rowe Price (TRP) and Eastspring Investments.

Despite the news of the reclosure of the Strait of Hormuz in the face of peace talks between the US and Iran, markets have remained resilient on expectations of an eventual end to the conflict.

“In the face of heightened geopolitical tensions in the Middle East, it has been surprising to see the relative resilience of most equity markets across the globe,” said Thomas Poullaouec, head of multi-asset solutions Apac at T. Rowe Price.

“Some suggest it reflects an optimistic view that the US-Israel war with Iran will be short-lived. But as the conflict drags on and the stakes rise, it is becoming a more uncertain bet.”

Where TRP is finding more certainty is in the resilience of equity market earnings, with upcoming earnings supported by fiscal spending, capex, tax incentives and artificial intelligence (AI) related broadening.

For now, “earnings momentum seems to be helping underpin the market and supporting our view that broadening can continue, provided the conflict does not
materially worsen,” Poullaouec said.

Markets are likely expecting the expiration of the Iran-US ceasefire on 22 April will lead to an extension of the ceasefire, according to Vis Nayar, chief investment officer at Eastspring Investments.

“This is leading to a focus on the potential for a post-war recovery in global energy supply rather than worst-case scenarios,” he said.

“US earnings resilience is also supporting markets. Although only 10% of S&P companies have reported Q1 earnings so far, 88% have beaten estimates with earnings 10.8% above estimates.”

With this backdrop, TRP has shifted to a modest cash overweight to take advantage of potential opportunities arising from market dislocations, and trimmed allocations to European, Japanese and Asia equities to neutral.

In the US, it has lowered exposure to small-caps to neutral on worries about delayed policy easing. Indeed, the energy shock caused by the Iran war has put the Fed’s widely anticipated rate cuts on hold.

In China, TRP has modestly added China to overweight, “as we think it may be less correlated to global markets, and real asset equities as an inflation hedge,” Poullaouec said.

Eastspring also believes China’s A-share universe is poised for strong growth ahead. The firm favours sectors that benefit from government support or have margins that are insulated from energy prices and excess capacity.

Advanced manufacturing and information technology also stand out relative to consumer stocks and companies that are pursuing export market share via product discounting, according to Nayar.

Elsewhere, he favours markets and companies with high growth and high growth insulation from energy prices, such as Korea and Taiwan for their exposure to the ongoing boom in AI infrastructure spending.

“We also see value in spillovers from AI demand, for example in photonic communications and low-earth-orbit communications companies in Taiwan,” Nayar said.