We said the Middle East ceasefire was dead. It has since escalated into a two-front war.

In August, we told investors that the Middle East ceasefire was dead, and even a resolution wouldn't fix the energy market, or stop inflation and bond yields from climbing further. We said this wasn't a problem that would resolve just because the fighting stopped.

Six weeks on, the evidence has only strengthened our view.

Not only is the ceasefire dead, the conflict has escalated and widened. What began as a standoff over a single chokepoint has now become a conflict spanning two. Refining margins have spiked. Inflation remains sticky. Bond yields have risen.

Here's what has changed and how we think you should be positioning your portfolio for it.

Related article: The Middle East ceasefire is dead. Rates are likely to stay higher for longer.

The war has widened from one chokepoint to two

Back in August, the conflict's focal point was the Strait of Hormuz. Iran wouldn't reopen the strait unless the US lifted its own naval blockade first; Washington said it could maintain that blockade indefinitely. Neither side moved.

That has changed.

Over the span of a single week in September, the Iran-aligned Houthi movement took effective control of the Bab el-Mandeb strait — the other route ships use to move oil between the Gulf and Europe or Asia. This single stretch of water carried about 7% of global oil output as recently as June, according to Kpler data.

Then came a second setback for oil supply. Drones — traced back to Iraqi territory — struck Saudi Arabia's East-West pipeline, the 1,200-kilometre lifeline that lets Saudi crude bypass the Strait of Hormuz entirely by moving overland to the Red Sea. It had quietly become one of the region's most important workarounds: Saudi Arabia had more than quadrupled the volume of crude sent through it since the war began, to around 4 million barrels a day — about 4% of the world's entire oil supply.

Saudi Arabia shut the line down on 11 September, and estimates for a full restart range from several weeks to as long as six. Even once it does restart, the fix will be partial: analysts expect the line to resume at only 40-60% of capacity initially, with Saudi Arabia prioritising its own refineries first — leaving little spare volume for export. This bypass route can no longer be relied on: the pipeline is offline, and this attack has shown it's a vulnerable target that can be hit again.

Meanwhile, ships that would normally sail through Bab el-Mandeb now face a war zone instead of open water.

They can round Africa via the Cape of Good Hope instead, adding weeks to every voyage and substantial extra fuel and charter costs. Or they can keep transiting the Red Sea instead, at a higher cost either way: the Suez Canal Authority raised transit surcharges across most vessel types this year, with crude oil tankers hit hardest — from 25% to 37% of standard dues on laden vessels. The hikes came as tanker traffic through the canal rose sharply, and just as tensions in the Red Sea flared up again. Either way, higher shipping costs get passed through to the price of fuel and the goods that ships carry.

This is precisely why we don't think this conflict resolves quickly — and why we think investors positioning for a swift de-escalation are underestimating just how much has changed since August.

Refining capacity is the real bottleneck

Previously, we said that even if Washington and Tehran shook hands tomorrow, it wouldn't fix diesel prices — refining capacity, not crude oil supply, was the real constraint, and refiners were already running at full capacity. A ceasefire doesn't change that.

Since then, the numbers have only strengthened our view. While refinery throughput has recovered somewhat, it is not enough. Global refiners hit a summer peak of 81.4 million barrels a day in August — still 4.2 million barrels a day below the same month a year earlier, according to the International Energy Agency. Much of that gap traces back to one region: Middle East refinery runs have fallen to roughly a quarter below pre-war levels.

This isn't just a Middle East problem. Russia — one of the world's largest refiners — has been losing capacity of its own, as Ukraine keeps striking its refineries with long-range drones. The IEA reports that a Russian refinery has been successfully hit, on average, once every three days this year. Russian diesel exports in August have collapsed by 81% from their five-year average, according to Vortexa data. The disruption is now serious enough that even Donald Trump has publicly urged Ukraine to stop striking Russian refineries, warning the attacks are "hurting the world," as US diesel prices crossed USD 6 a gallon for the first time.

And the world's spare capacity to fill that gap has already run out. US refiners, among the world's largest, hit close to 98% utilisation in late August — the highest level since 2018 and, according to analysts, close to the practical ceiling refiners can push without compromising safety. There's simply no slack left to absorb what the Middle East and Russia have lost.

Crude oil itself isn't the scarce part anymore — there's just not enough refineries able to turn it into diesel. That's why diesel crack spreads — the premium refiners earn for turning crude into diesel — have nearly tripled since the war began, from around USD 37 a barrel to over USD 105 today. US retail diesel prices have followed, up roughly 68% over the same period to USD 6.31 a gallon. Crack spreads alone jumped another 20% in just the past three weeks, as the Bab el-Mandeb and pipeline disruptions hit.

Chart 1: Diesel prices and refining margins have both surged again since the escalation

Refining capacity, not crude supply, is the bottleneck — and a ceasefire will not be able to fix that overnight. We expect diesel margins to remain elevated, and that means inflation will likely remain higher for longer.

Inflation is proving just as sticky as we warned

In August, we pointed to Federal Reserve meeting minutes and rising food and memory prices as early warning signs that inflation would stay sticky.

Our views have since been further reinforced. The US Congressional Budget Office now officially projects that the war itself will keep US core inflation meaningfully elevated through early 2027.

And we're already seeing exactly this kind of pass-through show up in hard data in the US itself. The energy shock itself has been severe: according to the US Bureau of Labor Statistics, gasoline prices were up 27.4% over the year in August, accounting for more than a third of the entire monthly rise in prices, and heating fuel surged 52%. But it's not staying contained there. Core inflation — the measure that specifically strips out energy and food, designed to show whether price pressure has spread into the broader economy — still rose to 2.4% that same month, even as headline inflation held at 3.4%.

It isn't just fuel, either. World food prices hit their highest level since 2022 in August, according to the UN's FAO, with the Iran war now named alongside Ukraine's disrupted grain shipments as a direct cause. And memory chip prices — driven by AI data centre demand — have risen roughly six-fold over the past year, according to Morgan Stanley, pushing up prices for laptops, phones, and other everyday electronics. The Fed itself has noted that AI infrastructure spending is likely to keep adding to inflation.

Chart 2: World food prices have climbed to their highest level since 2022

Inflationary pressures have forced central banks worldwide to act. On 16 September, the Fed raised interest rates for the first time since 2023 — unanimously — specifically to fight inflation that Fed Chair Kevin Warsh called "too high" for "too long." The Fed didn't just hike; it raised its own year-end inflation forecast at the same time, and most of its own policymakers now expect at least one more hike before the year is out.

The Fed isn't alone. The European Central Bank has hiked twice this year, most recently in September, and Singapore's monetary authority has tightened policy twice since April — both directly citing rising energy costs. Japan's central bank raised rates to 1.25% on 18 September, a fresh 31-year high, as it continues moving away from decades of ultra-low rates.

Not every central bank has moved yet — the Bank of England held rates this week — but even there, three of nine policymakers voted for an immediate hike, warning that energy costs from the war were pushing UK inflation toward 4% by early 2027.

Higher inflation and higher rates are not a US story. They are a global one.

Table 1: Central banks are raising rates together, and citing the same cause

How to position your portfolio in a higher-for-longer world

Our view hasn't changed.

Reduce your portfolio's exposure to interest rate risk, and favour short-duration bonds over long-dated ones — they mature sooner, so your capital is exposed to fewer years of further rate swings before you get it back. And it isn't just about inflation. Rising government deficits and massive corporate borrowing to fund AI infrastructure are both pushing global bond yields higher, competing for the same pool of capital.

Within equities, valuations matter more than ever — and the reason comes down to the time value of money. A dollar of profit earned today is worth more than a dollar of profit earned in a decade's time. Rising interest rates only widen that gap — the further out the profit sits, the less it's worth in today's money. That's why a cheap, profitable company earning the bulk of its value in the next few years tends to hold up better than an expensive, unprofitable one betting on profits far in the future.

It's also exactly why we continue to favour Asia over the US. Asian equities trade at a meaningful discount to the S&P 500, for earnings growth that's comparable. You're not paying up for growth in Asia. You're getting it at a discount.

Within the region, Asian semiconductors remain our highest-conviction idea. Samsung and SK Hynix carry some of the strongest balance sheets in global technology — together holding more net cash than the entire "Magnificent Seven" combined — and their demand is locked in years in advance through contracts that require customers to pay deposits upfront. Even so, they continue to trade at a discount to US chipmakers. The Global X Asia Semiconductor ETF (HKEX: 3119) remains our preferred way to access this opportunity.

We also favour China and Singapore alongside our core Asia semiconductor call.

In China, the GF CSI All-Share Information Technology ETF (SZSE: 159939) captures AI demand already visible in earnings, while the iShares Hang Seng TECH ETF (HKEX: 3067) trades well below its long-term average as a delivery-price war fades and AI-driven revenue at Alibaba Cloud and Tencent's advertising business starts to show up in the numbers.

Singapore offers something different: real resilience. During a sharp AI-related sell-off across the region's tech-heavy markets in July 2026, the Straits Times Index actually rose almost 12% while South Korea's KOSPI fell nearly 16% over the same period. Add a roughly 4.5% dividend yield — cash paid today, exactly the profile that holds up better as rates stay elevated.

The one exception to our caution on the US is internet names, and we remain positive here. AI demand is real and accelerating — cloud growth picked up across every major provider last quarter, and combined order backlogs among hyperscalers have reached roughly USD 1.7 trillion, evidence that capacity, not demand, is the actual constraint. Valuations haven't caught up to this strength: most hyperscalers have underperformed the broader market this year, with multiples still well below their historical averages even as earnings hold up. That gap between fundamentals and price is exactly why we like the space. The Invesco NASDAQ Internet ETF (NASDAQ: PNQI) remains our preferred way to access this.

Table 2: Recommended Products

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds positions in iShares Hang Seng TECH ETF and Global X Asia Semiconductor ETF.