There's a stagflationary shock from the Iran conflict. Japan, a big energy importer, is under pressure.

Markets are underestimating the impact. The VIX is at 27.5, half the level after Liberation Day. The stock market is down only 5% YTD, not even in correction territory, while 20% of the world's energy and 33% of fertilizer ingredients are not moving.

The quest is to find diversification and real inflation hedging. The environment where monetary authorities could relax policy is gone. If governments subsidize consumers, it will double the inflation impact, forcing monetary authorities to hike.

We've seen long-term rates rise 25 bps on the 10-year, real yields up, implied inflation up. Governments are announcing measures to prop up consumers at record debt levels.

There's been a flight to liquidity. US equities got a buy, but Treasuries and the dollar have not been safe havens. Gold sold off for cash. The Iran conflict creates a massive inflationary and growth shock.

We've moved from seeking the highest growth to the asset with the least downside risk. China, already discounted, has less downside risk, so the shock works in its favor.

Every day the straits are closed, Middle East oil producers run out of storage and shut production, which takes longer to restart. The fertilizer issue is a physical supply problem, not just price.

We are underestimating the impact on growth, inflation, and global capital markets. I'm optimistic global supply chains are resilient, but we will have higher food prices and monetary authorities will be less accommodative.

We had a Goldilocks economy ex-China, with AI producing real productivity gains, then this offset shock.

Institutional clients can invest in private credit, infrastructure, catastrophe bonds, China, and non-aligned EMs for real diversification. Retail investors are not well diversified and will pay more in volatility.

Hedge funds can add value for risk mitigation. Catastrophe bonds pay yield and are uncorrelated. Parts of private credit, like asset-backed finance, have underlying assets that are not impaired.