Over the past ten days, geopolitical tensions involving Iran have remained a key focus for global investors. While the situation continues to evolve, markets have so far responded in a fairly predictable manner, reflecting both the seriousness of the developments and the diversified sources of global economic resilience.
Much of the volatility stems from the uncertainty over timescales and largely dependent, as we saw through the Tariff volatility last year, on the comments from US President Trump. Last week, weakness followed comments on a potential timescale of several weeks until unconditional surrender was achieved. Yesterday, comments that the war may soon be over prompted a relief rally. For now, we remain in ‘wait and see’ mode and what lies ahead for the region and the wider market implications.
Market Reaction and Energy Prices
Geopolitical risk in the Middle East typically channels through the energy complex, and this period has been no exception. Concerns around potential supply disruptions, particularly across key shipping routes and oil‑producing regions, have put upward pressure on crude oil prices. Although moves so far have not reached the previous levels seen back in 2022, even incremental rises in energy costs can influence inflation expectations.
The effective closure of the Strait of Hormuz, a critical chokepoint through which roughly a fifth of the world’s oil supply typically passes, has driven oil prices even higher, with Brent Crude climbing above $100 a barrel yesterday before paring back gains.
Natural gas prices have also shown extreme sensitivity, given the region’s role in LNG shipping and the risk that conflict could affect transportation routes. That said, European storage and diversified supply chains have helped limit volatility.
Inflation and Interest Rate Considerations
Higher energy prices tend to filter through to headline inflation with a lag. Central banks have been clear that while they are prepared to look through short‑term spikes, a sustained rise in oil prices could complicate the path toward lower interest rates.
For now, policymakers remain focused on underlying inflation dynamics—particularly wage growth and services inflation—but any prolonged escalation in the region would introduce additional uncertainty. Markets have priced in slightly wider ranges for interest‑rate expectations as a result.
Upside and Downside Risks
Potential Upside Risks
Containment or de‑escalation could support risk assets as investors rebuild confidence.
Resilient economic data across major regions provides a cushion against geopolitical shocks.
Energy sector strength may bolster equity indices with significant commodity exposure.
Potential Downside Risks
A widening of the conflict could lead to sharper moves in oil and gas markets.
Persistent inflation pressures may delay central bank easing cycles.
Volatility in shipping routes, particularly around the Strait of Hormuz, could affect global supply chains.
Our Positioning: Diversified and Disciplined
Within our OEIC funds, we have maintained cash levels around 7.5%, giving us flexibility to act as opportunities arise or to provide ballast should volatility increase.
Our portfolios continue to be constructed with diversification at their core, spanning:
A blend of investment styles (growth, value, quality, income)
This approach ensures that no single risk, geopolitical or otherwise, dominates overall outcomes. While no strategy can eliminate risks entirely, diversification and prudent liquidity management remain the most effective tools for navigating uncertain environments.
If you would like to discuss your own circumstances in more detail, then please contact your Financial Planner or speak with one of our Investment Managers.
