Investors rush to cash, energy and other safe havens as Middle East war jolts markets

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SINGAPORE - Investor sentiment soured in March as the Iran war spread across the Middle East, triggering an oil shock that has hit global markets and sparked a rapid wave of de-risking.

Investors everywhere accelerated their rotation out of cyclical assets into defensive sectors such as energy and other perceived safe havens.

Active managers too have trimmed risk exposure: They are holding more cash and defensive assets; US equity allocations among fund managers have dropped sharply in recent weeks; and hedge fund net leverage has also declined.

Faced with huge uncertainty, people are de-risking their allocations, increasing their cash holdings in their portfolios, said Mr Gabriel Sterne, head of global emerging markets at Oxford Economics.

They are also rotating into asset classes that are less exposed to a prolonged oil shock, he added.

Surging oil prices have fuelled worries about weaker global growth, rising inflation and more hawkish central bank policies. 

Goldman Sachs said this has hurt multi-asset portfolios, leaving few diversification options and increasing the risk of deeper losses in traditional 60/40 portfolios, which comprise 60 per cent stocks and 40 per cent bonds.

When both stocks and bonds fall at the same time, investors who hold a mix of assets like stocks and bonds in a 60/40 portfolio have fewer diversification options. As a result, the chances of a bigger drop in the value of these portfolios increase.

Goldman Sachs Risk Appetite Indicator is now close to zero, reflecting a sharp drop in investor optimism. This is a stark contrast to the start of 2026 when markets took on risks, betting on a “Goldilocks” scenario of solid global growth, easing inflation and ongoing policy support. 

These assumptions are now being tested by the twin shocks of war and energy inflation.

Volatility remains elevated in both credit and equity markets, with investors staying defensive, Goldman Sachs said.

In Singapore, funds available for sale here saw US$668 million (S$860 million) in net inflows into energy equities from March 1 to 26, according to early estimates by Morningstar Direct on open-ended funds and exchange-traded funds (ETFs). The figures exclude money markets, feeders and funds of funds.

US fixed income bore the brunt of the sell-off, with the biggest net outflow at US$646 million, while precious-metal equities saw a net outflow of US$355 million.

Globally, about US$11 billion has been withdrawn from nearly 100 ETFs tracking precious metals and commodities since the conflict began, marking the largest monthly outflow on record, Bloomberg Intelligence data showed.

Gold-focused funds were the hardest hit, with over US$7 billion in redemptions as investors locked in profits. Silver ETFs also saw roughly US$1.4 billion in outflows. 

Flows into global energy equity funds have climbed to multi-year highs, matched by strong interest in oil ETFs, Goldman Sachs said.

Other defensive or infrastructure-linked sectors such as industrials and utilities have also drawn inflows globally.

Inflation-linked bonds have attracted inflows ahead of an anticipated rise in energy prices. At the same time, demand for the US dollar as a hedge has surged again, the bank said.

Mr Sterne said investment-grade sovereign credit now looks more attractive, supported by a stronger US dollar and rising energy export values.

Oxford Economics also upgraded high-yield sovereign debt to neutral, citing similar reasons, though it cautioned that these bonds remain vulnerable if markets shift into full risk-off mode.

Foreign exchange and local currency debt were downgraded to underweight, given their sensitivity to a sustained inflationary shock.

“A more sustained oil shock would deepen supply chain issues, feed into inflation expectations and inflation persistence more generally, and push yields higher,” Mr Sterne said.

He sees the Brent crude oil price averaging US$113 a barrel in the second quarter of 2026, returning to the pre-crisis level only by 2028. The May futures for Brent crude oil are trading around US$106 currently.

Despite the shifting risk appetite, Goldman Sachs observed that equity fund flows have not yet turned negative, suggesting that some investors continue to “buy the dip”, particularly in Europe and Japan.

Mr Sterne, however, cautioned against buying the dip given the elevated risks following the closure of the Strait of Hormuz.

So far, there has been little or no flight from riskier markets towards safer emerging market economies, he said.

The economist said emerging markets have buffers to withstand the negative impact of the current oil price shock.

Potential shock is unlikely to cause ruptures in financial systems like the 2008 global financial crisis or push vulnerable emerging markets into a debt crisis like during the Covid-19 pandemic.

“If the war ends, we expect to quickly return to our risk-on allocations,” Mr Sterne said.