Isi august 2026 v2

AUGUST 2026 | MULTI-ASSET Author

Investment Strategy Hani Redha, CAIA Global Multi-Asset Portfolio Manager

Insights: Schrodinger’s Strait: Toward a Partial Reopening About this Report

Our team believes that not only do differences of opinion make markets, but they also foreshadow substantial moves ahead as these differences are resolved. Once a month, investment leaders from our global multi-asset, equities, and fixed income teams meet to share their diverse viewpoints. This report reflects those discussions and debates by providing insights on the topic of the month along with snapshots of our asset class views and convictions across the firm.

INVESTMENT STRATEGY INSIGHTS: SCHRODINGER’S STRAIT: TOWARD A PARTIAL REOPENING

The situation in the Middle East deteriorated further than many expected following the June Memorandum of Understanding (MOU). However, the recent escalation should not be mistaken for a complete breakdown in diplomacy. Instead, developments increasingly resemble a low-intensity phase of conflict in which both sides are attempting to re-establish leverage before returning to negotiations. Strike intensity has moderated from previous peaks, there has been no significant military build-up beyond that which predated the recent uptick in hostilities, and communication channels appear to remain open behind the scenes.

The Strait of Hormuz remains at the center of the dispute. The fundamental disagreement is not about military victory but rather about control and interpretation of transit rights. The U.S. continues to view the Strait as open to all shipping, while Iran maintains a different interpretation regarding authority over traffic moving through its waters. The resulting ambiguity was a key driver of the recent attacks on commercial ships and remains the primary obstacle to a durable solution.

Importantly, neither side appears capable of achieving its objectives through military means alone. The U.S. cannot realistically keep the Strait permanently open at an acceptable economic and military cost, while Iran cannot force a broader U.S. withdrawal from the region. Equally important for markets, neither side appears willing to escalate toward a high-intensity conflict that directly targets major energy infrastructure. This significantly reduces the probability of worst-case outcomes, even as uncertainty remains elevated.

We still believe that a negotiated outcome is the most likely path forward. The challenge lies in constructing a framework acceptable to all parties. The existing MOU proved too vague and left room for conflicting interpretations. The most probable end state is some form of multilateral transit arrangement involving Oman and Iran, ensuring that neither country exercises unilateral control over one of the world’s most important energy corridors. At the time of writing, a potential deal seems close to completion, cementing Iran’s control over the Strait with Omani involvement. We shall see if such an arrangement is finalized.

For markets, the key issue is not the legal structure of any eventual agreement but the timeline for reaching it and the degree to which traffic through the Strait resumes. Several temporary buffers have supported energy markets thus far, most notably weak Chinese demand, fuel-switching and ongoing draws from strategic reserves. Yet, those buffers are not unlimited. China’s strategic petroleum reserve drawdowns have been particularly important in absorbing the shock. If current conditions persist for several more months, however, China may need to return to the global market more aggressively, creating additional upward pressure on oil prices. In that scenario, the market may prove considerably less resilient than it has been to date.

The more immediate stress point may not be crude oil itself but refined products and liquefied natural gas (LNG). Refinery utilization remains well below pre-conflict levels, crack spreads remain elevated and Qatar has continued to extend force majeure declarations on LNG exports. These conditions suggest that downstream energy markets remain tighter than headline oil prices imply. The longer disruptions persist, the greater the risk that shortages…