Hi, I'm Jim Smigiel, SEI's chief investment officer here with another installment of "SEI Forward." The onset of hostilities in the Middle East is the latest test for investors, and the broader market, as fears of a protracted conflict raise the specters of stagflation, recessions, and bear markets. The probabilities of all three outcomes have clearly increased amid supply disruptions in oil, fertilizer, helium, and other critical commodities. The potential for shortages in each extends the reach of this conflict well beyond energy and into other crucial parts of the global economy, including agriculture and even semiconductor production. And while this war began as a conflict between the US, Israel, and Iran, the hostilities quickly widened with the Iranian regime's retaliatory strikes against its gulf neighbors and the effective closure of the vital Strait of Hormuz. These developments underscore why, for a majority of the world, this crisis cannot be resolved quickly enough.
Despite the challenges, a near term-resolution remains our base case, which suggests that this resilient global economy will avoid recession. Notably, the world is substantially less reliant on energy today than it was during prior conflicts. In fact, it requires about half as much oil to produce a thousand dollars of gross domestic product today relative to the first Gulf War. Nevertheless, the critical role of the Strait of Hormuz in the global economy cannot be overstated. This very narrow body of water is responsible for the flow of 20% of global oil supplies. It has been subject to the whims of the Iranian regime for the last 47 years, leading to a fragile and quite frankly, untenable situation. In our view, it would be an enormously positive outcome for this conflict to be resolved in such a way that the global economy is no longer held hostage. However, the longer the strait is closed, the higher probability of an adverse outcome for both markets and the global economy.
While this is certainly not the first supply shock arising from war in the Middle East, the totality of the supply disruptions is significantly higher than any previous conflict in the region. Additionally, targeted strikes on infrastructure across the region is another wild card. These have the potential to extend the consequences of this war well beyond any formal end to the hostilities as bringing supply back online will simply take time. These supply disruptions contributed to volatile markets in March, in fixed income, shorter-term bonds sold off dramatically on inflation concerns from rising energy prices and expectations for tighter monetary policy pushing up their yields. Rate-sensitive two-year yields for G7 countries were certainly no exception, rising sharply since the fighting broke out in late February. US market expectations at the start of the year were for two full interest rate cuts in 2026, which have now been fully priced out. Elsewhere investors now expect multiple rate hikes from the Bank of England and the European Central Bank. We view the severity of this move in yields to be a bit overdone as policy makers are well aware that higher overnight rates cannot open the Strait of Hormuz. Nonetheless, with inflation above most targets and rising, we do expect most central banks to adopt a more hawkish stance in the near term.
This brings us to our asset-class level views, in fixed income, we believe that the two-year yields do look attractive at these levels, particularly in the United States. We remain positioned for lower short-term rates on our expectations for less restrictive monetary policy than is currently priced in. As for the back end of the curve, we are positioned for neutral to higher longer-term yields as we believe the debt situation will only worsen with the onset of war.
Elsewhere, credit markets continue to digest private credit concerns over the quarter with the gating of a few high-profile retail private credit funds grabbing quite a few headlines. While we do believe that private credit is due for a correction, we are confident that this will be relatively isolated. We simply do not see systemic contagion in this situation and no reflection of the leverage and breadth witnessed in the global financial crisis. Therefore, while we retain our defensive posture in credit markets we are eager to take advantage of opportunities presented by this broader spread widening.
Moving on to equity, we remain constructive in our outlook given our current views, including a near-term resolution to the conflict in the Middle East and the continued resilience of the economy and corporate earnings. This includes a strong preference for active management in light of the fluid situation in the region and higher levels of stock level dispersion. A value-oriented approach is a particular emphasis, and we expect continued outperformance for the remainder of the year. In addition, we still find emerging markets particularly attractive based on valuations and their overall leverage to what we see as a still-growing global economy.
Meanwhile, the current tensions raise the most concerns for Europe given the potential for an outsized economic impact from rising energy costs, which brings us to commodities. These were a bright spot over the quarter with broad commodity indices up over 24%. While energy was the key driver, agriculture including wheat and soybeans, and metals, including aluminum, all finished substantially higher. Commodities have been a key strategic and tactical position, and we remain positive on broad exposure.
While we see a near-term end to the conflict as a likely outcome, we expect post-war energy prices to remain elevated for 2026 as the closure of the strait and the damage to infrastructure cannot be reversed immediately. In addition, we believe that the selloff in gold seems overdone as we expect a resumption in demand from both investors and central banks. In this moment of heightened uncertainty for markets and geopolitics alike, we would like to thank our clients for their continued support.
