Almost 30 years ago, Thailand experienced a currency crisis that reflected familiar vulnerabilities: pressure on foreign exchange (FX) reserves, external imbalances and a buildup of short-term debt. The initial reaction from both policymakers and investors was to treat the episode as country-specific, something that could be analyzed and contained within Thailand’s own economic framework. But stresses soon began to emerge across other parts of Asia, including Indonesia, Malaysia and South Korea. Still, because each country had its own balance sheet, policy response and structural weaknesses, the knee-jerk reaction was to treat these as separate issues. But it wasn’t long before markets started to realize that something bigger was playing out, with currencies cascading lower, credit spreads widening and capital flowing out of the region day after day.
Just over a year later, in the late summer of 1998, stress appeared in a different form when Russia defaulted on its debt and devalued its currency. On its own, Russia’s situation could’ve been explained by idiosyncratic factors, but it occurred at a time when the broader system was already under strain. That strain intensified further with the dislocation surrounding Long-Term Capital Management later that year. For those unfamiliar with this episode, it remains a unique case study, but the key point is that market volatility forced this hedge fund to liquidate massive positions in a very compressed timeframe. As losses accumulated, those unwinds began to influence pricing more broadly, and liquidity conditions tightened in markets typically regarded as deep and stable, including in core funding markets.
Looking back, these developments didn’t represent a series of independent shocks. Rather, they formed a sequence in which each event added incremental pressure to a system that was already under stress, ultimately resulting in a level of volatility that exceeded what any single episode would have implied on its own. These experiences also had a lasting impact on how countries insulate themselves from future shocks, most notably through a sustained buildup of FX reserves and the adoption of policies designed to adapt to a new set of more reliable economic and security partners. It’s only in retrospect that the cumulative nature of that stress, and its mark on the world order, becomes clear.
The current war involving Iran is still being interpreted mainly as a regional conflict, involving a defined set of actors and a sequence of developments that can be followed in relatively contained terms. Market reactions reflect that perspective, with energy prices and sentiment adjusting to each major headline. Moreover, geopolitical and oil analysts are drawing on past crises to assess how this period might evolve and what it could mean for both oil-dependent and non-dependent economies. The question, however, is whether that framing is sufficient, because how this shock interacts with stresses that are already present across the system, including some that are well known and others that are less apparent, and how long that interaction lasts, will ultimately matter. The scenarios that emerge from that broader lens may prove more informative than relying on narrower comparisons to past oil-related events.
For instance, there are ongoing questions around private credit and how it behaves when liquidity tightens. There are pressures tied to energy and other commodities, not only in terms of price but also supply and their role in broader industrial and agricultural activity. There are also adjustments underway across AI-related sectors, from software to infrastructure, where expectations and capital spending remain in flux, alongside more specific constraints, such as helium supply, that feed into semiconductor production and, in turn, the broader technology ecosystem.
We also must consider that the longer any disruption to oil supply persists, the more it puts economies and their central banks in a difficult position, as they’re forced to respond either to inflation pressures from higher energy costs or to slower growth tied to tighter financial conditions. Those policy choices don’t happen in isolation and can amplify stresses across more fragile countries that might otherwise have remained stable before the conflict.
When the Covid pandemic hit, it’s fair to say we were reminded, pretty forcefully, of how deeply interconnected the world really is, how shocks in one area can spread quickly across others and how long the after-effects can last. That remains a useful guide as developments in the Middle East continue to unfold.
From an asset allocation and risk management perspective, the implication isn’t to run to cash, nor is it that every regional conflict turns into something systemic, as most don’t. The more important point is that when multiple stress factors are already present, including those that may not yet be fully visible, the threshold for broader interaction becomes lower and the risk of a more pronounced market repricing rises.
In an environment where the interaction between geopolitics, inflation, liquidity and growth is less predictable, it makes sense to focus on the most defensive and liquid areas of fixed-income. Front-end US Treasuries, government money market instruments and other high-quality public market exposures, such as inflation-linked securities, offer a combination of liquidity and flexibility that becomes increasingly valuable as volatility intensifies. These aren’t simply places to hide, but instruments that preserve optionality at a time when the sequence of risks is still unfolding and the full set of outcomes isn’t yet visible.