Investors Living in a Fantasy World, Warns Turkish Strategist

Global equity markets appear to be ignoring mounting geopolitical and macroeconomic risks stemming from the Iran war and the broader Gulf crisis. Despite a historic supply shock, investors continue to price in optimism, raising concerns of a sharp correction ahead.

Markets Defy Reality as Risks Mount

As of Monday’s close, the S&P 500 has fully recovered its losses since the start of the Iran war. Asian markets also opened higher, reflecting strong risk appetite.

Yet, according to Yesilada this optimism is dangerously misplaced.

Equity funds are behaving as if the global economy is not facing its largest supply shock since the 1970s. Markets are not only misreading the geopolitical implications of what he describes as a “Gulf Crisis,” but also underestimating the economic damage that will follow once the conflict subsides.

The core issue, he argues, is simple: both sides in the Iran–U.S./Israel conflict believe they are winning. In such conditions, peace is unlikely.

But the bigger mispricing is not about the war’s outcome—it is about what comes after.

The Mispricing Problem

Stock markets typically rise for two reasons: either corporate earnings improve, or interest rates decline.

However, major institutions—from the International Energy Agency to the IMF—are largely aligned in expecting the opposite: weaker growth and higher inflation.

Markets usually price future risks either gradually or abruptly. Given that equities have not meaningfully priced in a prolonged stagflation scenario, FÖŞ expects a sharp correction.

He predicts the S&P 500 could fall at least 20% from recent highs.

Some analysts now warn that the Gulf crisis, combined with central bank policy uncertainty, artificial intelligence disruption, and accumulated risks in shadow banking, could trigger a new global financial crisis.

This worst-case scenario, once considered a “black swan,” is increasingly viewed as a tangible risk.

Supply Shock Will Outlast the War

Yesilada downplays the duration of the war itself and instead highlights a more critical issue: the long-term damage to supply chains.

The conflict is unlikely to end through a decisive victory. Rather, it may conclude once missile stockpiles are depleted—a process that could take months.

An optimistic scenario would see hostilities easing within 1 to 1.5 months, allowing shipping routes such as the Strait of Hormuz and the Red Sea to normalize.

However, the damage has already been done.

Iran has reportedly targeted over 80 critical energy facilities. Repairs could take anywhere from three months to as long as 18 months.

As a result, Brent crude prices are unlikely to fall below $100 per barrel in the near term.

Disruptions are also spreading to other commodities, including fertilizers, aluminum, and helium.

Oil Market Reality Diverges from Futures Prices

Yesilada stresses that widely quoted oil prices are misleading.

Futures contracts (“paper barrels”) do not reflect actual market conditions. Spot Brent prices reportedly reached $150 per barrel, highlighting a severe supply shortage.

Global Economy Faces Stagflation Risks

According to projections by the IMF and World Bank, inflation is set to rise while growth slows.

If inflation accelerates further, central banks will have little room to cut rates. In fact, renewed rate hikes could return to the agenda if inflation expectations deteriorate.

This environment could also trigger liquidity tightening.

AI Investments and Corporate Spending at Risk

High interest rates and rising energy costs are likely to undermine large-scale investments, particularly in artificial intelligence.

The author points to two key risks:

• Rising financing and energy costs may reduce returns on major investments
• Elevated uncertainty could delay capital expenditure, weakening demand for AI technologies

Shadow Banking: A Hidden Vulnerability

The shadow banking system, with assets approaching $2 trillion, is heavily exposed to technology and AI-linked corporate bonds.

While these assets are still held at nominal value, market prices may have already fallen by up to 25%.

A wave of defaults in this sector cannot be ruled out.

Although not necessarily large enough to trigger a full systemic crisis on its own, such stress could amplify broader financial instability.

A Crisis Scenario No Longer Unthinkable

Atilla Yesilada emphasizes that these concerns are no longer fringe views.

Financial media and analysts are increasingly debating these risks. While not all scenarios may materialize, the accumulation of threats cannot be ignored.

In a worst-case outcome, global markets could face a shock similar to the early phase of the Covid-19 crisis—or even a synchronized downturn spreading into the real economy.

“Cash Is Still King”

The Author concludes that large institutional investors managing trillions of dollars cannot ignore these risks indefinitely.

He warns that May could mark a turning point, when markets “wake up” from what he describes as a fantasy phase.

Until uncertainty clears, he advocates a defensive strategy:

“Cash is still king. Even low-yield deposits or liquid funds can protect against inflation. Be content with modest returns—preserve your capital.”

Translated by ChatGPT from original Turkish Article