Repowering high-energy portfolios

Tensions in the Middle East continue to inject volatility into energy markets, with uncertainty around the security of supply routes through the Strait of Hormuz sustaining a persistent geopolitical risk premium. While there have been intermittent signs of de-escalation, the situation remains fluid, and confidence in any near-term resolution is fragile.

Markets have reacted sharply to each shift in sentiment. “Crude oil prices tumbled, while S&P 500 and Nasdaq 100 futures climbed. Bond yields edged lower. The dollar weakened, and gold moved higher,” says James Bevan, investment consultant and former CIO of CCLA, referring to the initial response to easing tensions. Yet he cautions that “a two-week pause is not a resolution”, and that markets will remain “highly sensitive to any breakdown in talks”.

For investors, the more important shift lies beyond near-term volatility and into the structural role energy now plays across markets. Energy is no longer just a sectoral allocation; it is now a core macro driver, shaping inflation, growth and cross-asset dynamics.

“The supply shocks from the war will undoubtedly boost inflation over the next few months,” Bevan says, pointing to the way higher energy costs feed into production, trade and consumption. Even economies with greater domestic energy capacity are not insulated, given the global nature of supply chains.

This impact also extends well beyond oil, feeding through into the broader real economy. Energy-intensive sectors, from metals and manufacturing to agriculture, are acutely exposed to disruptions in fuel supply and pricing. Aluminium markets offer a clear example: supply chain bottlenecks, damaged infrastructure and restricted shipping routes have driven sharp price increases and reduced global availability. The effects ripple further, feeding into fertiliser production, transport costs and ultimately food prices.

The underlying demand backdrop also remains structurally strong. Rudolf Leemann, equity strategist at UBS GWM’s Chief Investment Office, notes that energy consumption continues to be driven by long-term trends, particularly digitalisation. “Global energy needs will remain strong and increase as lifestyles evolve and become ever more energy consuming,” he says, pointing to the growing role of artificial intelligence.

“The recent tensions are not a development that is fundamentally altering this long-term, broad and very consistent trend,” Leemann adds.

Prices under pressure

While recent tensions, according to Leemann, will not alter this fundamental long-term trend, lasting damage to Middle Eastern infrastructure will act as a key constraint on supply, believes Frédérique Carrier, head of investment strategy at RBC Wealth Management.

“We expect energy prices to remain elevated in the foreseeable future regardless of any possible resolution to the hostilities,” she says.

Even in a best-case scenario, she notes it could take months to restore production, with “considerable upside to the price of crude” in a prolonged conflict.

At the same time, she argues the rationale for the energy transition is evolving. “If there was any doubt about the need for energy security, this recent episode has dispelled it,” Carrier adds, highlighting how national security is reinforcing the economic case for renewables.

This growing complexity is also sharpening the tension between immediate energy needs and longer-term transition goals. “Balancing short-term energy security concerns with long-term decarbonisation commitments requires a detailed analysis of winners and losers,” says Bevan, alongside “a multi-period assessment of risks and expected pay-offs”.

Yet the idea that the transition would deliver a seamless “win-win” for investors is being challenged. “The ‘win-win’ narrative for investment was never well thought through,” Bevan argues, noting that it depended on a specific period in which traditional energy underperformed and new energy outperformed.

As a result, investor behaviour is diverging. “Now it becomes much more apparent that there are costs associated with the green agenda,” he says. “And I see families dividing themselves into those that genuinely have a philanthropic sustainability agenda and those that are really about making money.”

This does not mean abandoning sustainability but reframing it. Bevan is particularly critical of blanket divestment strategies, arguing that excluding oil and gas companies risks limiting engagement at a time when their capital and technical capabilities remain critical to developing future energy systems, particularly infrastructure and storage.

Keeping it real

A deeper reconfiguration of energy investments is likely to result from the current environment, argues Grace Peters, co-head of global investment strategy at J.P. Morgan Private Bank.

“Geopolitical developments over recent months have reinforced what we have long viewed as a structural shift in how capital is allocated across the energy sector,” she says, as a more fragmented world becomes increasingly relevant to investors.

This is visible across asset classes, with currencies diverging between exporters and importers, rates adjusting to inflation concerns, and domestic supply chain security rising up the agenda.

For energy-importing economies, elevated oil and LNG prices “weigh on real incomes, corporate margins and trade balances”, particularly when currencies are under strain.

In response, energy resilience is now being embedded into long-term planning frameworks, Peters notes, with infrastructure spending increasingly linked to national security objectives.

Against this backdrop, she sees a clear shift in portfolio construction. “The case for real assets and infrastructure as a core portfolio allocation has strengthened,” she says, as investment returns and energy security priorities are coming into close alignment.

This is not a short-term dynamic, she says, but reflects deeper structural forces redefining national security, including supply chain resilience, domestic energy independence and rising power demand from AI.

The transition, however, is unlikely to be linear. US power demand is expected to grow at around 2.5 per cent annually through 2030, driven by electrification and data centres, raising the risk of supply shortfalls if capacity lags.

“The solution looks different depending on where you are,” she notes, with the US relying more on oil and gas as a bridge, while Europe focuses on renewables and grid modernisation.

For investors, private infrastructure represents the “most meaningful entry point” into the energy transition, combining “stable, inflation-resilient, contractual cash flows” with exposure to secular growth trends.

Yet it remains underrepresented in portfolios. “Power now represents approximately 60 per cent of the global private infrastructure index, yet infrastructure represented less than 1 per cent of family office portfolio allocation,” she notes. “Closing that gap is one of the more important portfolio construction conversations happening right now.”

The implications extend beyond infrastructure alone. As energy demand becomes increasingly tied to digitalisation, investment opportunities are broadening across the value chain. Leemann at UBS says investors should look beyond generation. “We advise diversifying along the value chain from equipment suppliers, across to energy utilities and down to materials companies that all supply the necessary tangible assets and electricity needed.”

This fragmentation is also reflected in how energy markets are priced. Leemann notes that “energy markets try to price in both fundamentals and geopolitical tail risks”, but that different energy sources operate under distinct pricing mechanisms.

While oil prices may reflect near-term geopolitical tensions, longer-term pricing, particularly in electricity markets, is increasingly driven by fundamentals and long-term contracts, particularly with AI hyperscalers.

Selective allocation

Not all investors view the current shock as structural.

“We currently interpret the conflict as a cyclical disruption to oil markets,” says Manuela D’Onofrio, head of investment strategy at UniCredit, with recovery dependent on restoring navigability in the Strait of Hormuz and repairing damaged infrastructure.

Her base case assumes a gradual easing in prices, with “oil prices expected to gradually decline toward the $80 per barrel by year end, with a further easing to around $70 in 2027”.

However, the outlook remains unclear. “Given the inherent unpredictability of conflicts, we refrain from providing our own estimate of the cycle’s duration.”

This uncertainty reinforces a disciplined approach. “We avoid taking pronounced top-down sectoral or thematic bets,” she says, favouring bottom-up stock selection based on fundamentals.

Within the transition, capital allocation is becoming more selective. “Power grids are likely to attract significant investment,” she notes, alongside storage and small modular reactors, driven in part by rising electricity demand from AI-enabled data centres.

A resilient energy portfolio may require a balance between transition and traditional assets, she says, with roughly equal exposure to clean energy and cash-generative conventional players offering strong dividends.

The link between energy and digital infrastructure is becoming increasingly important, she adds. Hyperscalers are entering long-term agreements to secure reliable power, in some cases directly financing nuclear capacity.

Corporate demand is also accelerating investment. Minesh Shah, managing director at renewable infrastructure investor TRIG, highlights growing interest in long-term power purchase agreements “driven by the attractive cost of electricity” from renewables.

At the same time, he says, the current environment “has added greater urgency for investment in renewable energy, electricity storage and grid infrastructure”.

Crucially, deployment timelines are improving. “The real benefit is the speed of deployment, with the time from the final investment decision to operations generally under 18 months,” he notes, highlighting how repowering and battery projects are accelerating capacity deployment in the UK and Europe.

Beyond allocation decisions, energy is also becoming an operational consideration.

“Many families with family office structures are huge users of energy,” Bevan notes, and rising costs can materially affect both businesses and estates. Direct control of energy, particularly sustainable sources, can therefore become “an important part of maintaining overall wealth growth”.

Energy, in other words, is no longer just a sector or a theme, but sits at the centre of macro strategy, portfolio construction and operational resilience.