Portfolio manager update on the Middle East situation

The escalation of conflict in the Middle East is the latest in a series of major geopolitical shocks that have tested global markets over Scottish Oriental’s 30-year history. This note sets out why we believe the Trust’s portfolio remains well positioned – and what the current environment may mean for our holdings over the longer term.

A large-scale US-Israeli military campaign against Iran began on 28 February 2026, targeting high-value sites and nuclear-related infrastructure. Iran retaliated with extensive missile and drone attacks on Israel and US bases across the Middle East, hitting targets in Bahrain, Iraq, Jordan, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The broader region has rapidly destabilised.

Of particular significance for global markets is the fact that Iran has maintained control over the Strait of Hormuz – a critical shipping corridor responsible for around 20% of global seaborne oil and liquefied natural gas (LNG) supply. Disruption to traffic through the Strait has driven energy prices higher.

Limited impact on Scottish Oriental’s portfolio

While we do not underestimate the potential for further volatility in the short term, Scottish Oriental’s holdings should remain fundamentally resilient. The portfolio is invested in high-quality, cash-generative companies across Asia and has no holdings in the Middle East; as such, we would expect direct portfolio impact to be limited.

Indirectly, the conflict will likely lead to inflationary pressures. Freight rates and energy prices have surged, as oil refineries and LNG producers across the region have shut. Although Asia is heavily dependent on the Middle East for its energy needs, emerging markets have historically operated in a more inflationary and volatile environment, and this is reflected in our stock selection.

The Trust is invested in companies with high-quality management teams who think long term and counter-cyclically, operating in industries with deep moats that support predictable returns on capital. These businesses tend to have solid pricing power due to strong brands, high switching costs, or network effects. Importantly, many of our holdings carry net cash positions (i.e. they hold more cash than debt), providing flexibility during periods of economic stress.

Over the last three decades of managing the Trust’s investments, our experience has been that companies with these characteristics tend not only to withstand periods of severe market disruption, but often to emerge with their competitive positions strengthened. This was evident during the Asian Financial Crisis, the Global Financial Crisis, and the dislocations caused by SARS and Covid‑19, and we would expect to see a similar pattern play out this time.

Longer-term implications

Looking beyond the immediate market reaction, we see two longer-term trends emerging from the conflict that are relevant to the Trust’s investments.

First, a sustained period of higher and more volatile energy prices is likely to sharpen the focus on energy efficiency across Asian economies. Companies whose products and services help customers reduce energy intensity and improve productivity stand to benefit from this shift. A good example is the Trust’s Chinese holding Airtac International, which manufactures precision pneumatic components used in industrial automation. Its products enable more efficient production processes and can help lower energy consumption across a wide range of manufacturing applications – a proposition that becomes even more relevant in a high-energy-price environment.

Second, we expect a renewed push across Asian economies to strengthen and localise supply chains, particularly in energy and infrastructure. This is not an entirely new dynamic: the Covid-19 supply shock and the Russian invasion of Ukraine had already prompted governments and businesses across the region to reassess their reliance on external sources of supply. The current conflict is likely to accelerate that process, driving investment in domestic energy production, transmission and distribution networks. One holding well placed to benefit is KEI Industries, a leading Indian cables and wires manufacturer. As India continues to expand and upgrade its electricity grid, KEI should see sustained and growing demand.

In summary, we continue to closely monitor developments in the Middle East as the situation evolves. Nevertheless, short-term market dislocations do not alter the underlying investment rationale for the Trust’s holdings. The portfolio has been constructed to stay robust through periods of volatility, and such environments have historically enabled us to add to high‑conviction positions at more attractive valuations. With this in mind, we are actively looking for opportunities on behalf of Scottish Oriental.