Institutions 'Almost All' Bearish on Geopolitical Risk
Tony Pasquariello, Goldman Sachs' Head of Hedge Fund Coverage, reports that the overwhelming sentiment among institutional investors is bearish, with the conflict in Iran identified as the primary source of market disruption. His analysis indicates that downside risks currently suppress upside potential, prompting a recommendation for investors to simplify risk exposure and increase cash positions. While markets have so far weathered one of the largest oil supply shocks in history with limited equity declines, Pasquariello warns this apparent stability is misleading.
The core concern is that the longer the conflict persists, the higher the probability that the market narrative shifts from a manageable, supply-driven inflation event to a genuine "growth scare." This view is reportedly more pronounced among commodity market specialists, who have a deeper understanding of the physical disruptions to oil, natural gas, and refined products. Their heightened concern signals that the true economic impact may be underestimated by generalist investors.
OECD Slashes UK GDP Growth Forecast to 0.7%
Tangible evidence of the emerging economic damage comes from the Organisation for Economic Co-operation and Development (OECD), which has nearly halved its UK GDP growth prediction for the current year from 1.2% to just 0.7%. This 0.5 percentage point downgrade, equivalent to a £15 billion economic blow, is the largest among all G20 nations. The OECD also raised its UK inflation forecast for 2026 from 2.5% to 4%, intensifying the cost-of-living crisis.
This economic strain is felt unevenly across regions. Pasquariello notes that Goldman's prime brokerage data shows a rapid liquidation of European equity positions accumulated over the past year. In contrast, Asian markets have shown notable resilience. South Korea's KOSPI index, for instance, has gained approximately 29% year-to-date despite foreign capital outflows. According to client feedback, both South Korea and Japan are the markets where investors retain the most medium-term confidence.
Goldman Recommends De-Risking as Tail Risks Remain High
The convergence of these factors leads Pasquariello to a stark conclusion: tail risks are high. He notes that while some technical indicators like the RSI for the S&P 500 and Nasdaq 100 have fallen to their lowest levels since last April, a true capitulation-style sell-off has not yet occurred beyond short-term funds. The broader risk profile remains skewed toward negative outcomes, suggesting that the market has not yet experienced the level of damage seen in past crises, such as the 33% decline in the Nasdaq 100 during 2022.
Given the unfavorable risk-reward balance and the dominant "downward asymmetry," Pasquariello's guidance for market participants is unambiguous. He reiterates that there is a strong case to "simplify risk, modestly add to cash, and be prepared to engage" decisively once the geopolitical situation clarifies. This cautious stance emphasizes capital preservation until a more favorable entry point emerges.
