The story for March was crashing asset prices as markets scrambled to reprice the Iran war. The key question is whether the profit growth (18% forecast for each of the next two years) will stay incredible or if it will become non-credible in the face of rising energy costs. We still have cash, but nowhere near as much as we did a week ago.
The Iran war is dominating headlines and asset allocation. The worst-case scenarios would be devastating for stock markets. But, given the strength of current earnings, any semi-reasonable resolution (or even an uneasy detente) will be positive for stock markets.
Geopolitics, Greed, and Portfolios: Why We’re Moving Out of Cash
Investing is all about uncertainty. And right now, there is more than enough uncertainty to go around.
At the start of the war, we moved significantly into cash. A week later, we moved even more. But I no longer think it is time to be positioned for disaster. I acknowledge there is a lot of risk around this decision. We need to be aware of the potential for disaster, but recognise that two out of three participants are actively looking for an exit.
Big Picture
The Middle East is transitioning from the era of ideology to the era of the invoice.
Recently, global markets have been gripped by the fear of an escalating regional conflict—a scenario that threatened to shut down the Straits of Hormuz, wipe out 30% of global energy supply, and plunge the world into a devastating recession. In response, many investors (ourselves included) moved heavily into cash to protect capital from the catastrophic tail risks.
But over the past few weeks, the landscape has fundamentally changed. We are no longer watching a march toward destruction; instead, we are watching a tense, high-stakes negotiation over the world's most lucrative bank account.
The immediate catastrophic risks have receded, replaced by a new reality: a persistent, higher cost of energy. And while this brings new challenges like sticky inflation, it is a reality the global economy can ultimately handle.
Here is why greed is suddenly the most stabilising force in the Middle East, how the "ceasefire" will likely play out, and exactly how we are repositioning our investment portfolios.
The Three Players: When Greed Overcomes Ideology
To understand where the markets are heading, you have to parse the motivations of the three major actors driving this conflict: Trump, the Iranian Revolutionary Guard and Netanyahu.
When you strip away the political rhetoric, a clear trend emerges: two sides are heavily financially and politically incentivised to find an "off-ramp" and keep the oil flowing. The other would probably prefer to spoil any deal.
1. The United States: Trump's Search for a Salable "Win"
Trump does not want a global recession under its watch, especially with midterm elections looming. Trump is actively searching for a deal he can sell as a definitive victory. The historical details of the checks and balances matter less to him than the headline. If he can secure a ceasefire that (in name) restricts nuclear ambitions while perhaps extracting a "toll" or economic concession, he can declare himself the ultimate dealmaker. His paramount goal is stability wrapped in the optics of Trumpian triumph.
2. Iran’s Revolutionary Guard: The Get-Rich Factor
The original elite guard in Iran—those who traditionally controlled the lucrative black markets—were largely wiped out in the initial phases of the conflict. The second-tier leadership that has now stepped up has a simple choice: pursue ideological martyrdom, or enjoy their turn at the top of the wealth hierarchy. History suggests they will choose the latter. For this new guard, keeping the regime stable and getting rich is far more appealing than a destructive war. Trump’s proposed deals implicitly offer them a path back to wealth generation.
3. Israel: The Outlier Seeking Perpetual Emergency
The only true wildcard is Benjamin Netanyahu. For Netanyahu, peace is a political disaster. A permanent end to the conflict likely dissolves his emergency coalition and accelerates his domestic legal trials, including international arrest warrants. Also, it probably leads to a stronger Iran. Consequently, he is inherently motivated to prolong the conflict to maintain power.
The core risk for global markets is whether Israel can successfully torpedo these deals, or whether the combined financial weight and fatigue of the U.S. and Iran will force a prolonged stabilisation.
The billion-dollar toll booth
There are discussions circulating about a "toll" imposed on ships passing through this critical checkpoint—rumoured to be up to $2 million per ship. Oman claims half of the strait and may take its cut, and the U.S. might implicitly or explicitly command a slice as well. But even after the bribes and splits, the numbers for Iran's Revolutionary Guard are staggering.
If roughly 30 ships pass through daily paying this toll, and Iran keeps around $1.2 million per ship, that equates to $36 million a day, or $13 billion a year.
For context, that is equivalent to 3% to 4% of Iran’s entire GDP. They would be generating massive revenue simply for holding back their drone strikes. Add to this the potential easing of sanctions, allowing Iran to sell an extra million barrels of oil per day (another 10% of their GDP), and the financial incentives for peace become overwhelming.
Would Iran prefer to permanently close the Straits and invite a catastrophic regional war, or keep the Straits open and collect billions in toll revenue? The inertia of greed points squarely to the toll booth.
The Thin End of the Wedge
In geopolitics, it is crucial to separate the noise from the intended direction—what we call the "thin end of the wedge."
For example, when Putin invaded Ukraine, the noise varied wildly, but his core intent was always permanent territorial acquisition. The motion was in one direction. Suggestions of peace talks were noise, not signal.
Initially, the wedge in the Middle East was an uncontrollable spiral into war. Today, the new wedge is ceasefire. There is going to be daily noise—a broken promise here, a skirmish there— but there is a genuine question about whether the default momentum has shifted.
The U.S. is probably happy to indefinitely drag out the peace talks to maintain economic stability. Iran wants to stretch the negotiations to silently rake in billions.
If this status quo holds, the world averts the 30% collapse in energy supplies. Instead, we face a manageable "5% oil tax" levied on global exports.
Can the world economy handle a 5% energy surcharge out of the Middle East? Absolutely. It means shipping costs rise and oil prices stay structurally higher for years as global inventories are rebuilt, but it does not spell the end of economic growth. The era of the geopolitical invoice means the consumer will ultimately pay the bill—probably heavily falling on major oil importers like Europe, Japan, and China—but the system remains intact.
The Rubber Hits The Road: Changing Your Portfolio
When catastrophic risks recede but inflation risks rise, your investment strategy must pivot. Standing still is dangerous.
Here is exactly how Nucleus Wealth has shifted portfolios in response to this new era:
1. Moving Out of Cash
At the start of the war, we raised significant cash defences. Today, with the catastrophic "tail risks" much lower and the financial incentives of a ceasefire higher, holding exorbitant cash is no longer justified. We have significantly reduced our cash positions and deployed capital (not all, but a significant amount) back into the markets.
2. Avoiding Traditional Bonds
If energy prices remain structurally higher for the next few years, inflation will be "sticky." Central banks in the U.S. and Europe will cut rates more slowly than anticipated. In Australia, the Reserve Bank might hold rates higher for another six months—or even hike them if global growth reignites. In a higher-for-longer inflation environment, traditional bonds suffer.
3. Hedging with Inflation-Linked Assets
To protect our purchasing power against the "5% oil tax" and sticky inflation, we are heavily favouring inflation-linked bonds over direct, traditional government bonds. We are actively trading through the energy sector, balancing where we want to hedge energy costs against where we see upside utility.
4. Capitalising on Corporate Earnings
Despite the geopolitical noise, the underlying health of top-tier businesses is extraordinary. The S&P 500 is forecasting near 18% earnings growth for 2026 and 2027. Yes, the market is currently priced higher than its historical average (sitting around the 75th percentile of expensiveness). But when you are staring down two consecutive years of 18% earnings growth, that premium is absolutely worth paying. If disaster is avoided.
The Asymmetry of Hope
The problem? The distribution of outcomes is not a neat bell curve. It’s a cliff.
- Upside: If a deal is struck, we are looking a markets that are a little expensive and extremely high earnings growth. A reasonable trade off.
- Default course: We are in an interminable standoff of "almost" deals and extended deadlines. But, if ships get through, energy prices are high but not catastrophic, then there is a navigable path for stock markets.
- Downside: Extreme. At the other end of the spectrum lies $200+ oil and a deep, structural global recession as energy supply chains are physically smashed.
Net effect: we are still carrying a little excess cash, but weighing up the risks and the incentives of the participants, it does not seem appropriate to carry extraordinary levels of cash anymore.
Asset allocation
We spent the month significantly underweight in shares. We are overweight inflation linked bonds. We put most of our cash into foreign currencies, and have been using that cash as we bought back stocks in early April. At the end of the month our allocation was still more conservative as can be seen below:
Performance Detail
Core International Performance
With the war with Iran escalating, markets realised this may not be a quick operation, and stocks moved lower worldwide. Defensive stocks and Energy related stocks outperformed. Currency was an offset especially in the US as the USD weakened.
Core Australia Performance
Growth stocks, Banks and Gold miners underperformed while Defensive and Oil & Gas stocks proved safe havens in this bearish month.