Equity Portfolio Risk Management Framework (May 2026), following Strait & Narrow — our Q2 2026 outlook. The tail risk we flagged in May has now materialised: the April ceasefire has fully broken down, active conflict has resumed, and the transmission channels we identified are all firing. This note reviews how the framework has performed and where we go from here.
The Ceasefire Has Failed and We Are Back to Square One
The optimism that carried markets through May and June has evaporated. The April 8 ceasefire held only in the loosest sense; the June 14 Memorandum of Understanding between Presidents Trump and Pezeshkian, which promised 60 days of safe commercial passage through Hormuz, collapsed within weeks after Iranian drone and missile strikes on three commercial vessels that had bypassed Tehran’s preapproved routes. The US reimposed its naval blockade in early August. On September 1, US forces struck Iranian command centres and missile sites for the sixth consecutive day, and Iran retaliated across four US-aligned states with a multi-front missile and drone barrage — the most geographically dispersed single-night response of the entire conflict. We are back to square one, only with less market cushion this time.
The framework is precisely the situation we built it for. The 10-year US Treasury yield has pushed past 4.79% — the highest level since October 2023 — with the 30-year at 5.27%, the highest since 2007. Fed funds futures now price a 66% probability of a rate hike this month, up from 40% just last week, following Chair Warsh’s commitment at Jackson Hole to combating inflation. Brent remains anchored above $90/bbl. Every transmission channel we mapped in May is now firing simultaneously.
Framework Review: What Has Worked, What Comes Next
Our long-term constructive stance on growth equities remains intact. The AI infrastructure buildout, LLM productivity unlock, and quality franchise compounding all continue to underpin the long-duration equity story. But this is exactly the moment where the risk management framework earns its keep. Portfolios that were already sitting on year-to-date gains in May are now navigating both an active conflict and a bond market rout. The four prongs remain the right architecture; the individual leg outlooks are updated below.
| # | Prong / Names | Updated View |
|---|---|---|
| 1 | Energy & Fertilizers XLE, XOM, OXY, CF, NTR, UAN Still Working | Brent above $90/bbl continues to deliver exceptional free cash flow at $50/bbl marginal extraction costs. With the naval blockade back in place and Iran actively targeting Gulf shipping, the supply-side thesis has strengthened, not weakened. Fertilizer names continue to benefit from disrupted urea and gas flows. We stay long. |
| 2 | Tanker Shipping FRO, INSW Convexity Delivered | Tanker rates have spiked again on renewed rerouting around the Cape and the reimposed US blockade. Both FRO and INSW have benefited from elevated day rates and variable dividend distributions. This remains the highest-convexity prong — exit discipline matters most here. We are trimming into strength while maintaining core exposure. |
| 3 | Defence LMT, RTX, GE, BA/ LN, RR/ LN, HEI, SHLD Structural | The tailwind has strengthened. Six consecutive days of US strikes and a multi-front Iranian retaliation across Jordan, Bahrain, Kuwait, and Iraq mean munitions consumption is accelerating and replenishment cycles are lengthening. European rearmament budgets continue to expand independently. We maintain the full basket. |
| 4 | Rates Hedge (ITM TLT Puts) TLT ITM puts Played Out — See Below | The trade has worked very meaningfully. The 10-year has moved from ~4.4% at publication to 4.79%+, and the 30-year now yields 5.27%. Higher deltas on our ITM strikes captured the move efficiently. Forward outlook now more nuanced — the risk/reward has shifted materially and we address this in the section below. |
Prong 1 Deep Dive: The Impasse Is the Thesis
Our base case is not resolution, and it is not full-scale escalation, it is impasse. We do not expect the turmoil in the Middle East to resolve in its entirety. The more likely path is a continuation of the current state: a grinding stalemate in which neither side achieves a decisive outcome, Hormuz transit remains contested and periodically interdicted, and no durable settlement emerges. This matters more for the energy trade than any single escalation headline, because it is duration, not peak price that drives the windfall.
The critical variable is the number of days oil trades above $75/bbl. At $50/bbl marginal extraction costs for the low-cost producers we own, every day spent above $75 compounds into free cash flow that consensus models are not capturing. Sell-side estimates and forward curves both tend to mean-revert oil assumptions toward long-run averages, which means an extended period of elevated prices delivers a sequence of positive earnings surprises rather than a single re-rating. The longer the impasse persists, the larger the cumulative cash generation and the greater the gap between delivered and expected earnings.
This is why we are comfortable holding the energy leg without needing a re-escalation. A spike to $120 would be additive, but it is not the requirement. Even a slow, unresolved grind at $90 with occasional flare-ups and equally occasional false dawns on diplomacy produces windfall economics for producers, sustained margin expansion for North American nitrogen, and continued balance sheet repair and shareholder returns across the complex. The permanent supply destruction from Ras Laffan and the broader Gulf infrastructure damage means the floor under prices has structurally risen.
Net implication: we maintain full positioning across Prong 1. This is the leg with the most favourable asymmetry in an impasse scenario. It requires no further deterioration to keep delivering, and it is the only prong where the passage of time itself is the primary value driver.
Prong 4 Deep Dive: The Rates Hedge From Here
The short bonds thesis has played out very meaningfully. Since publication, the 10-year yield has climbed close to 40 basis points and the 30-year has reached its highest level since 2007. Our preference for ITM puts with their higher deltas meant the position captured the bulk of that move with limited premium bleed. This has been one of the most successful legs of the framework.
Looking forward, we see limited scope for another rapid leg higher in yields. The move has been extended, positioning is now crowded on the short side, the Treasury has already announced a doubling of long-dated buybacks starting September 9 to try to cap the ascent, and much of the inflation shock is now discounted in the curve. A repeat of the last three months’ velocity is unlikely.
Equally, we do not see a near-term retracement in yields. Larger structural factors are now the dominant driver, principally the US fiscal deficit, which the CBO has just revised upward to $2.1 trillion for the year (a $200 billion increase versus February) and which is becoming genuinely unsustainable. The current administration has shown no meaningful appetite for spending curbs, and Treasury issuance is competing for capital with a $1.5 trillion year of AI-related corporate debt issuance. Even if the Fed pivots, the term premium at the long end has structural reasons to stay elevated.
Net implication: the trade now has limited downside potential — but we should not expect the kind of gains we have captured since May. We maintain the position at a reduced size, roll into fresh ITM strikes to preserve the delta profile, and treat this leg as protection rather than a return generator going forward.
The tail risk we hedged is now the base case. The framework is doing its job — discipline now means holding the protection, not celebrating it.
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