In his weekly commentary for October 13, 20261, BMO Global Asset Management Chief Investment Officer Sadiq Adatia works through three interconnected risks demanding simultaneous investor attention: a widening Middle East conflict keeping oil expensive and inflation conversations alive, European sovereign bond pressures drawing uncomfortable comparisons to the early 2010s, and a question about whether the AI-driven equity rally can broaden meaningfully into smaller-company terrain.
Oil: The Risk Premium That Will Not Disappear
The Strait of Hormuz stalemate is not resolving. The U.S.-Iran conflict has spilled into Yemen and Saudi Arabia, and Adatia is direct about the structural implication: "investors need to be aware that there needs to be a risk premium attached to anything that is related to that region, including oil."
Markets have followed a familiar script. As Adatia observes, "markets tend to react strongly to the initial news of a conflict but absorb the situation quickly, essentially assuming that the situation will eventually return to the status quo." What has made this episode different is persistence: "oil prices and, by extension, inflation have stayed elevated longer than many were anticipating," he notes, keeping rate hike risk on the table in a way markets had hoped was behind them.
Political timing adds another variable. President Trump has signalled he will not take further military action against Iran before the November midterms, but that commitment expires on election night. What follows, particularly if results disappoint Republicans, remains an open and consequential question. BMO GAM holds a neutral stance on Energy this month, with scores edging marginally higher given higher-for-longer oil dynamics. "We expect oil prices to remain elevated," Adatia states, "and we continue to employ hedges in our portfolios to counter lingering uncertainty."
Europe: Fiscal Fault Lines Without the 2012 Blueprint
Rising bond yields in France are generating Eurozone sovereign debt crisis flashbacks. Adatia acknowledges the anxiety but pushes back against a direct historical mapping. The 2010s crisis was driven by deficit spending, overleveraged banking, and the GFC's aftershocks. Today's yield environment shares the symptom but not the cause: U.S. yields reflect higher productivity, while European yields signal genuine fiscal and economic headwinds.
The structural problem underneath is one Adatia identifies plainly: "the EU is not, in fact, a unified state, but rather a collection of independent countries, the economic and fiscal health of which may vary quite widely at any given time." That heterogeneity creates contagion risk, which appears to be materializing now.
What concerns the team most, however, is the bond market's behaviour itself. "The bond market is supposed to be a safe haven when investors get spooked, but it is not acting that way currently." That breakdown in the traditional safe-haven function bears watching. The verdict: the situation appears manageable at this stage, but it is not one to dismiss.
Equities: The AI Broadening Thesis and Its Rate Dependence
Small-and-midcap performance has held up reasonably well through most of 2026, even with the past month's underperformance. The team remains overweight. Valuation support is intact, smaller company multiples look more attractive than the largest AI names, and profit margins with consumer spending continue to provide a reasonable floor.
The rate path, however, is the swing factor. Rate hikes hit smaller companies proportionately harder than large-caps, and the Fed's next moves will determine how much runway the broadening thesis has. Adatia's case for small-and-midcap as a relative AI beneficiary rests on a simple and memorable observation: "an AI agent can make a bigger difference on a team of 15 than it could on a team of 500." Efficiency gains that mega-cap firms have largely captured through scale and workforce size are, in relative terms, more transformative for leaner operations. Small-cap firms in Resources also carry optionality from a potential commodities cycle.
Five Key Takeaways for Advisors and Investors
- Geopolitical risk premiums in energy markets are structural, not transient. Portfolio construction should reflect that ongoing reality.
- Post-midterm U.S. policy uncertainty is a live variable. The pre-election constraint on military action does not extend beyond November.
- European fiscal stress is not a 2012 replay, but the EU's structural lack of fiscal unification creates genuine contagion exposure worth monitoring.
- The safe-haven function of bonds is temporarily impaired. Traditional diversification assumptions warrant revisiting in this rate environment.
- The rate path is the primary determinant of whether the small-and-midcap broadening thesis extends or stalls through the balance of the year.
Footnote:
1 Adatia, Sadiq. "Hedging Against Headline Risks." BMO Global Asset Management, 13 Oct. 2026, https://bmogam.com/ca-en/insights/weekly-commentary-october-13-hedging-against-headline-risks/.
