Bank of America strategist Michael Hartnett says a drawn-out conflict involving Iran could prompt a meaningful reallocation of global assets, benefiting commodity-linked investments, strengthening the U.S. dollar and boosting defense-related equities while creating headwinds for economies that import much of their energy.
In a Friday research note, Hartnett framed the likely winners and losers under an extended conflict scenario. He said the reallocation would favor oil, the U.S. dollar, U.S. technology and global defense sectors, at the expense of countries that import energy yet have limited exposure to energy equities. Hartnett singled out Korea, Japan and Europe as particularly vulnerable groups in that latter category.
Hartnett also cautioned that an escalation in hostilities represents the "biggest threat to Japan & Europe bank bull leadership." The observation stresses that prolonged geopolitical risk could undercut investor confidence in financial sectors within those regions.
The strategist contrasted this escalation scenario with an alternative path: de-escalation. Under easing tensions, Hartnett's framework implies the opposite positioning trade could take hold, with investors reducing exposure to oil and the U.S. dollar while risk assets stabilize. He specified tactical triggers in that scenario, noting positions to "sell oil $90/bbl, sell US$ >100 DXY," and indicating renewed demand for long-dated U.S. Treasuries.
Hartnett additionally discussed how equity corrections driven by external shocks tend to behave amid strong investor sentiment. He said such corrections frequently conclude after oversold assets settle and crowded trades unwind. However, he warned markets have not yet undergone the sharp price resets that typically mark a durable bottom.
The strategist further emphasized the U.S. dollar's role as a barometer for global liquidity conditions. He argued a decisive move in the dollar index above 100 could reinforce tighter liquidity and heighten the risk of inflationary pressures that are tied to energy markets.
Recent fund flows appear to reflect some of these rotations. For the week ended March 4, bonds registered $19.7 billion of inflows, equities drew $11.5 billion and cash funds attracted $5.6 billion. Regionally, U.S. equity funds experienced outflows of $13.9 billion, marking the largest withdrawal in six weeks. By contrast, Europe posted a fifth consecutive week of inflows totaling $800 million, emerging-market equities netted $9.9 billion of inflows and Japanese equity funds took in $4.2 billion.
Sector-level flows underscored a tilt toward energy exposure. Energy funds saw a record weekly inflow of $7.0 billion. Financials suffered notable weakness, recording their largest four-week outflow since April at $4.7 billion. Gold funds, meanwhile, experienced $1.8 billion of outflows, the biggest weekly withdrawal since October.
Hartnett's framework lays out two clear potential market regimes tied to the conflict's trajectory: one that benefits commodity-linked assets, the dollar and defense names if fighting persists; and another that rewards reduced commodity and dollar exposure with renewed appetite for longer-dated Treasuries if tensions ease. He also flagged the dollar's move above 100 as a key liquidity signal and highlighted current flow patterns that already show investor preference for bonds and energy exposure.
Clear summary
A prolonged Iran conflict would likely shift asset allocation toward commodities, the U.S. dollar and defense sectors while disadvantaging oil-importing regions with limited energy equity exposure, notably Korea, Japan and Europe. De-escalation could reverse those moves, prompting lower oil and dollar exposure and greater interest in long-term Treasuries. Recent flows show heavy inflows into bonds and energy funds alongside outflows from U.S. equity funds and gold.