Navigating the Iran shock

As with any investment, your capital is at risk.

Recent military strikes involving the US, Israel and Iran have unfolded with unusual speed, and the human stakes are plainly grave. Markets have moved just as quickly.

This note sets out our current assessment and what we are doing with it – calmly, analytically and without pretending to know what cannot yet be known. The picture is rapidly evolving and could shift materially in either direction.

Since the beginning of the conflict, the strategy has fallen by mid-single digits, marginally less than the benchmark's decline. 

The situation

The market is facing an energy and uncertainty shock. Disruption around the Strait of Hormuz has highlighted a simple truth: global finance still relies on physical choke points. Oil remains the main and most noticeable signal because it directly affects inflation expectations, household confidence and corporate margins.

The pattern has been recognisable: investors have sought safety, risk assets have sold off and liquidity has become more valuable. The nuance is that this is not a clean ‘bonds-rally, everything-else-falls’ episode. An oil-driven inflation pulse can delay easing even as growth fears rise. That mix – higher inflation risk with weaker growth – explains why markets have again reached for the word 'stagflation’. It also explains why growth equities can be hit from two sides: higher discount rates and lower risk appetite.

As we write, futures pricing has shifted towards around one US rate cut this year and a non-trivial chance of none, as investors weigh the inflation impulse from energy against softer growth. That is not our forecast; it is simply what market activity is projecting.

Our approach

Edinburgh Worldwide is built upon bottom-up stock picking. We do not manage the portfolio by making macro calls, and we are sceptical of anyone who claims to consistently succeed at forecasting wars, elections or central bank activity.

Our edge comes from understanding individual companies: what they sell, why customers buy, how durable the competitive advantage is and whether management teams can execute through adversity.

We look for businesses that can grow cash flows faster than the market over five years and beyond, typically because they solve important problems via genuine innovation.

The presence of long-term pricing power then reflects the value of their solutions and services. Their success is often determined by execution, which plays out over a period much longer than a single quarter’s news flow.

But that does not mean geopolitics is irrelevant. We may not ‘call’ geopolitics, but we do pay close attention to events that can plausibly change long-term cash flows, supply chains, funding conditions or trade rules. 

Direct operational exposure

Across the portfolio, reliance on direct revenue from Iran-adjacent geographies is limited. Most holdings sell into global end markets and few have operational footprints tied to the region.

That reduces the risk of sudden earnings drops caused by disrupted local demand. This does not eliminate risk, but it shifts our primary attention to transmission mechanisms and second-order effects.

Energy prices and the cost of capital

The immediate risk is straightforward: higher energy prices raise inflationary pressures and can keep rates higher for longer. That raises the discount rate applied to long-duration cash flows and tightens financial conditions for smaller companies. It may also have more direct effects on a handful of rate-sensitive holdings.

Volatility in energy prices can squeeze margins and increase economic uncertainty. IREN is the clearest portfolio example where power is a core input cost. But it is not a one-dimensional story. IREN’s operations are structured around renewable power. Its British Columbia sites have been powered by renewable energy since inception – predominantly direct renewable supply, with a small portion via renewable energy certificates – and its Texas site is supplied via renewable certificates.

More importantly, the company has been pushing hard to broaden its opportunity set, including a recent announcement to expand AI cloud capacity to 150,000 GPUs. GPUs are the core building blocks of AI computing, and capacity at this scale enables AI services to operate reliably and at scale. That matters: it shifts IREN away from a single-factor narrative (crypto-mining) and towards the long-term need for scaled compute.

American Superconductor sits on the other side of the energy-security equation. When energy becomes a national security issue, grid resilience and modernisation stop being ‘nice to haves’. If this episode accelerates investment in network upgrades, that is supportive of demand, even if forecasting exactly when it materialises can be difficult.

On capital costs, we are focused on the small set of holdings most exposed to credit conditions, including Upstart. Higher rates can reduce borrower demand while raising required returns for the funding partners who provide loan capital, a difficult mix.

The more constructive counterpoint is that Upstart’s model is designed to react quickly. In our discussions with management, the speed of recalibration – pricing, underwriting, partner terms – has been a defining feature.

Upstart has recently lived through a historic rate shock and weak macro (2022-2024); management has been clear that this episode materially improved the platform. And if rates surprise to the downside, we see considerable value in the shares relative to the current valuation.

Twist Bioscience is another name we are watching closely. The company remains in growth mode, but importantly, we see no immediate liquidity concerns. It continues to execute pleasingly: reported fiscal 2025 revenue growth was around 20 per cent, and reported first-quarter fiscal 2026 revenue growth was in the high teens.

The risk is less about demand disappearing and more about capital markets becoming less tolerant. Accordingly, we are monitoring cash runways, burn discipline and the cadence of progress against strategic milestones.

A final point on portfolio construction is worth stating plainly. Process changes, notably a portfolio construction framework based on financial maturity and funding risk introduced at the start of 2025, have meaningfully adjusted the portfolio’s exposure.

Its introduction has helped lower our implied duration. The proportion of free-cash-flow-generating and EPS-positive businesses has increased over the same period and now exceeds 60 per cent of assets.

The aggregate portfolio now has a positive net margin, versus roughly -12 per cent around 24 months ago. That does not make us immune to discount-rate shocks – but it does mean the portfolio is better shaped for a world where capital is more expensive and investors’ time horizons shrink.

A new world order

The world is not just more volatile; it is more strategic. Security, resilience and sovereignty are reshaping spending – defence modernisation, supply-chain control, critical minerals and the infrastructure behind advanced computing. In today's world, the line between economics and national security is thin and policy becomes a key driver of demand.

The Iran conflict has not directly influenced our defence exposure. It has, however, unfortunately reinforced why we have been building it. Over the past two years, we have increased our aerospace and defence exposure by more than 60 per cent, and it now accounts for over 13 per cent of the portfolio across six holdings.

These are not traditional primes. We are investing in the faster-growing seams of modern deterrence:

• uncrewed systems and autonomy
• space-based intelligence, surveillance and communications
• and software-led modernisation of security

Recent conflicts, from Ukraine to Iran, have shown how drones have moved from an ‘adjacent’ capability to a decisive advantage, for both offence and defence. Holdings such as AeroVironment and Kratos are well-positioned for this trend.

These have also sharpened the strategic value of sovereign access to space and resilient communications, supporting the long-run thesis for Rocket Lab and aspects of AeroVironment’s business. The same logic extends to hypersonics: as speed and survivability become central, the value shifts toward enabling infrastructure – testing, targets, responsive launch and related systems – where Kratos and Rocket Lab have relevant exposure.

Even where the end-market is domestic rather than overseas, Axon being the example, periods of geopolitical stress tend to raise the priority placed on internal security and force modernisation.

We’ve seen before that in the aftermath of heightened tension, procurement timetables often compress, budgets can be supplemented, programmes accelerated and demand brought forward.

Put simply, it can accelerate the move towards a faster, software-driven, ‘unmanned-first’ security paradigm, and our defence cluster is positioned for that shift.

Bottom line

We expect further volatility. In the near term, the risk premia may widen and sentiment may overshoot.

We will not, however, respond to headlines for the sake of activity. We will only act when there is evidence of a material, durable change in the long-term prospects of a holding, whether that is impairment or opportunity.

The portfolio is built around structural growth and is increasingly anchored by businesses with stronger cash flow characteristics while remaining true to our pursuit of ‘early-stage innovation’. We believe many holdings have balance-sheet resilience and strategic relevance that will compound through this period.

Our job is to stay disciplined, keep doing the company work and use volatility to improve the portfolio, not be ruled by it. 

Important information

This communication was produced and approved in March 2026 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

This article does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are not statements of fact and should not be considered as advice or a recommendation to buy, sell or hold a particular investment.

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA).

Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the FCA.

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