Khan Capital | March 2026
Key Takeaways
- Defence stocks are supported by a multi-year spending upcycle accelerated by the Iran conflict: munition restocking, expanded missile defence budgets, and bipartisan political commitment to a $1.01 trillion US defence budget create a durable earnings tailwind.
- Energy is the only positive major sector in 2026 at +33% YTD, supported by the Strait of Hormuz closure, structural underinvestment in supply, and the energy security imperative driving a multi-year infrastructure investment cycle.
- Gold’s structural bull case rests on record central bank purchases, de-dollarisation trends, and inflation hedging demand, with J.P. Morgan targeting $6,300 and Deutsche Bank $6,000 per ounce by year-end 2026.
- A barbell portfolio combining geopolitical exposure (defence, energy, gold) with quality growth assets, while underweighting rate-sensitive and energy-importing sectors, may offer the most resilient positioning for the current environment.
- The rebuilding premium from depleted reserves, damaged infrastructure, and restocking requirements will sustain demand across all three pillars for years beyond the conflict’s resolution.
The geopolitical landscape of 2026 has forced a structural rethink of portfolio construction. The US-Israeli military campaign against Iran, the effective closure of the Strait of Hormuz, and the cascading disruptions to energy, fertiliser, and shipping markets have created an environment where traditional sector allocations and risk frameworks are inadequate. Defence, energy, and gold have emerged as the three pillars of the geopolitical portfolio: a framework for positioning that prioritises exposure to the sectors and assets most directly supported by the new regime of elevated conflict risk, supply disruption, and inflation volatility.
This is not a tactical trade. The structural forces underpinning these three sectors, government defence spending commitments, energy security investment, and central bank gold accumulation, operate on multi-year timescales that extend well beyond the resolution of any single conflict.
| Pillar | 2026 YTD Performance | Key Catalyst | Institutional View |
|---|---|---|---|
| Defence | Significant gains since Feb 28 | Iran conflict, munition restocking, $1.01T US defence budget | Morgan Stanley: Northrop Grumman top pick |
| Energy | S&P Energy Index +33% YTD | Strait of Hormuz closure, supply underinvestment | Only positive major sector in 2026 |
| Gold | $5,050-5,200/oz range | Central bank buying (800t forecast), geopolitical hedging | J.P. Morgan: $6,300; Deutsche Bank: $6,000 |
Defence: The Multi-Year Spending Upcycle Accelerates
The defence sector has been in a structural upcycle since Russia’s invasion of Ukraine in February 2022. Germany’s €100 billion special defence fund, NATO’s commitment to 2% of GDP spending targets, and the broader rearmament of European militaries created a demand backdrop that was already transforming the sector’s earnings trajectory. The 2026 Iran conflict has added a powerful additional catalyst.
Defence contractors have been among the clearest market winners since Operation Epic Fury began on 28 February. Lockheed Martin, Northrop Grumman, and RTX Corporation have all posted significant gains as markets price in accelerated procurement timelines, expanded missile defence budgets, and the depletion of munition stockpiles that will need to be replenished over years. The operational tempo of the Iran campaign, which has consumed precision-guided munitions, cruise missiles, and bunker-buster ordnance at rates that exceed peacetime production capacity, virtually guarantees a sustained restocking cycle.
The political dynamics reinforce the spending trajectory. Defence budgets, once politically constrained by competing domestic spending priorities, now enjoy bipartisan support in the United States and broad political consensus across Europe. The White House has proposed $1.01 trillion in defence spending for 2026, one of the largest military budgets in US history. NATO allies are accelerating procurement programmes. The question is no longer whether defence spending will increase but by how much and for how long. Morgan Stanley’s recommendation to increase exposure to defence, security, aerospace, and industrial resilience themes reflects a growing institutional consensus that this is a multi-year demand cycle, not a tactical bounce.
Within the sector, investors may wish to distinguish between prime contractors (Lockheed, Northrop, RTX) who benefit from large-platform procurement, and the technology and cybersecurity names (Palantir, CrowdStrike, L3Harris) that benefit from the increasing digitisation of warfare and the prominence of AI-assisted targeting, surveillance, and cyber operations. The reported use of advanced AI tools in Operation Epic Fury underscores that modern conflict is as much a technology competition as a kinetic one. Morgan Stanley has named Northrop Grumman its top pick and upgraded L3Harris and General Dynamics to Overweight.
Energy: From Cyclical Trade to Structural Imperative
Energy has been the only positive major sector in 2026, with the S&P 500 Energy Index up approximately 33% year-to-date while technology is down 7% and financials are down 10%. The Strait of Hormuz closure has transformed what was already a constructive supply-demand backdrop into an acute supply crisis, driving Brent crude above $100 and pushing European gas prices toward 2022 crisis levels.
The investment case for energy extends well beyond the immediate price spike. Three structural forces support a sustained allocation.
First, years of underinvestment in upstream oil and gas production, driven by ESG-related capital withdrawal and pandemic-era capital discipline, have left global spare capacity at historically low levels. Even before the Iran conflict, the buffer between global production capacity and demand was uncomfortably thin. The removal of approximately 10 million barrels per day of Gulf production from the market has exposed this vulnerability with dramatic clarity.
Second, the energy security imperative will drive a multi-year investment cycle in diversified supply infrastructure. LNG terminal construction, pipeline expansion, strategic reserve replenishment, and domestic production incentives are all being accelerated across energy-importing nations. The United States, as the world’s largest LNG exporter and a net energy exporter, is structurally advantaged. US shale producers and LNG operators like Cheniere Energy capture both the elevated commodity price and the structural demand for non-Gulf supply.
Third, the renewable energy transition, far from being undermined by the current crisis, is being accelerated by it. European policymakers have explicitly framed energy independence from fossil fuel imports as a national security objective. Investment in solar, wind, nuclear life extensions, and grid modernisation is being fast-tracked. The crisis creates opportunities in both traditional energy (near-term earnings and cash flow) and clean energy infrastructure (long-term capital deployment).
For portfolio positioning, the key distinction is between producers (who benefit directly from higher prices) and consumers (who suffer from input cost inflation). Within energy, US-based producers with no Gulf exposure, midstream operators with contracted cash flows, and LNG exporters may offer the most attractive risk-reward profiles.
Gold: The Ultimate Geopolitical Hedge
Gold’s behaviour during the 2026 crisis has been more nuanced than the simple “safe haven rallies during conflict” narrative suggests. The metal surged from $5,296 to $5,423 per ounce immediately after Operation Epic Fury began, then sold off over 6% to $5,085 as rising real yields and dollar strength created headwinds, before stabilising in the $5,050-5,200 range.
The short-term price action obscures the structural bull case, which rests on forces far more powerful than any single conflict. Central bank gold purchases have been running at record levels for three consecutive years, driven by the desire to diversify reserves away from dollar-denominated assets, a motivation that was dramatically reinforced by the 2022 freezing of Russian central bank reserves. China, India, Turkey, and numerous emerging market central banks have been accumulating gold at a pace that is absorbing a significant proportion of annual mine supply. J.P. Morgan forecasts central bank purchases reaching 800 tonnes in 2026.
The inflation dynamics of the current crisis add a second structural support. Oil-driven inflation, if sustained, will force central banks to maintain higher real interest rates, but the uncertainty about the inflation trajectory itself creates demand for inflation hedges. Gold is the oldest and most liquid inflation hedge available, and its role in portfolios becomes more valuable precisely when inflation is volatile and unpredictable rather than stable.
J.P. Morgan’s year-end target of $6,300 per ounce and Deutsche Bank’s $6,000 target reflect institutional conviction that the structural drivers, including central bank buying, geopolitical risk, fiscal sustainability concerns, and de-dollarisation trends, will dominate the cyclical headwinds from rising real yields. For portfolio construction purposes, a 5-10% strategic allocation to gold may provide asymmetric protection: limited downside in a benign scenario, significant upside if the geopolitical and inflationary risks currently in play intensify further.
Constructing the Geopolitical Portfolio
The practical challenge for investors is integrating these three themes into a coherent portfolio framework that balances geopolitical positioning with broader diversification requirements.
The barbell approach. One effective structure is a barbell that combines high-conviction geopolitical exposure (defence, energy, gold) on one end with quality growth assets (select technology, healthcare) on the other, while underweighting the cyclical and rate-sensitive sectors most vulnerable to the stagflationary impulse: consumer discretionary, commercial real estate, and energy-importing industrials.
Currency and geographic considerations. The geopolitical portfolio has an inherent US dollar bias, as US defence contractors, US energy producers, and dollar-denominated gold all benefit from dollar strength during risk-off episodes. International diversification may wish to focus on commodity-exporting economies (Norway, Canada, Australia, select Middle Eastern markets) while maintaining caution on energy-importing economies (Germany, Japan, India) where the terms-of-trade shock is most acute.
Hedging the resolution scenario. The geopolitical portfolio performs best when conflict persists and worst when conflict resolves quickly. Investors may wish to consider how they would rebalance if a ceasefire is announced, oil prices decline sharply, and the market rotates back toward growth and risk assets. Options strategies that provide upside participation in a relief rally while maintaining core geopolitical exposure can help manage this transition risk.
The inflation-protection overlay. Across all three pillars, the common thread is inflation protection. Defence spending is government-funded and inflation-indexed. Energy prices are the primary driver of headline inflation. Gold is the traditional inflation hedge. Complementing these positions with Treasury Inflation-Protected Securities (TIPS), commodity ETFs, and real asset exposure creates a portfolio that is structurally positioned for the inflationary consequences of prolonged geopolitical disruption.
What the Market Is Getting Wrong
The “sell any extreme moves” advice may be premature. Some initial takes recommended selling spikes in defence, energy, and gold on the assumption that the conflict would not last beyond two months. As the crisis enters its second month with no diplomatic off-ramp in sight, this timeframe looks increasingly optimistic. Investors who sold energy at $90 oil or defence stocks after the initial spike have already left significant returns on the table.
The rotation is more durable than consensus assumes. The sector performance divergence in 2026 (energy +33%, tech -7%, financials -10%) is not merely a tactical response to conflict headlines. It reflects a structural repricing of which sectors benefit from the new regime of higher energy costs, elevated inflation, and constrained monetary policy. Technology, whose valuations depend on low discount rates and unconstrained AI capex, faces headwinds on both fronts. Energy and defence, whose earnings are supported by government spending and commodity prices, face tailwinds.
The rebuilding premium is being underestimated. Even after a ceasefire, the physical damage to Gulf refining infrastructure, the depletion of strategic petroleum reserves (400 million barrels released by the IEA), and the destruction of Iranian military assets will all require years of reconstruction and restocking. This creates a sustained demand impulse for energy infrastructure, defence procurement, and commodity supply that extends well beyond the conflict’s resolution.
Conclusion
The 2026 geopolitical portfolio is not a bet on war continuing indefinitely. It is a recognition that the structural forces driving defence spending, energy security investment, and safe-haven demand operate on timescales that far exceed the duration of any single conflict. Governments that have committed to 2%+ of GDP on defence will not reverse those commitments when a ceasefire is signed. Energy infrastructure that takes three years to rebuild will not materialise overnight. Central banks accumulating gold to diversify away from dollar reserves will not reverse course because oil prices moderate. The geopolitical portfolio is a framework for investing in a world where conflict risk is persistent, energy security is a national priority, and the assumptions of the post-Cold War era can no longer be taken for granted.
Sources: TheStreet / Morgan Stanley, Morgan Stanley Wealth Management, Yahoo Finance / Morgan Stanley, J.P. Morgan Global Research, TheStreet / Deutsche Bank, MINING.COM
Related Reading
This portfolio analysis was shaped by the geopolitical events covered in Operation Epic Fury, Oil Above $100: Strait of Hormuz Crisis, and The New Middle East: GCC Economic Model Under Threat. For the Fed’s response to the crisis, see Fed Holds Amid Iran War. The revised Section 232 metals tariffs that accompanied the pharmaceutical announcement are examined in Trump’s 100% Pharmaceutical Tariffs: Liberation Day One Year On. For the OPEC+ supply decision that landed as the war premium began to drain away, see OPEC Production Increase Meets the Peace Trade.
Related Reading: see the Hormuz blockade entering its second month.
Update (May 2026): see also Trump-Xi Beijing Summit 2026: The G2 Reset and What It Means for Markets for the latest related coverage.
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