From Geopolitical Headlines to Markets
By Brooks Macdonald
What Investors Should Consider
Recent developments in Iran and the wider Middle East region have led to a rise in geopolitical risk and market unease. Periods like this tend to generate intense news coverage, but for investors it is important to distinguish near term developments from the forces that shape long term investment outcomes.
What has happened?
Over the weekend, geopolitical tensions in the Middle East escalated following United States and Israeli air strikes against Iran. Iran subsequently responded with missile strikes targeting US military facilities in the region. Alongside this, concerns have emerged around commercial shipping through the Strait of Hormuz, which is the narrow stretch of water between Iran and Oman that represents the only sea passage from the Persian Gulf to the open ocean and one of the world’s most strategically important energy transit routes. Following attacks on oil tankers, tanker traffic through the strait has slowed, although Iranian officials have indicated they are not seeking a full closure. As is typical in situations of heightened geopolitical tension, developments are evolving quickly and the range of possible outcomes remains wide.
How markets are reacting and the key implications:
- Energy markets: The Middle East plays a central role in global energy supply and transportation. Heightened tensions often lead to higher oil prices as markets price in additional risk, even in the absence of an immediate disruption to supply. Over the weekend, oil prices have risen by more than 7%, reflecting this increase in risk premia rather than confirmed changes to supply or demand.
- Inflation considerations: Energy prices feed into inflation, particularly if higher prices persist. However, global central banks generally focus on whether such moves are sustained and broad‑based, rather than responding to short‑term price volatility driven by geopolitical events.
- Market sentiment: Periods of uncertainty can lead to short-term market volatility as investors reassess risks and exposures. These moves often occur even when underlying economic fundamentals have not materially changed.
Market reactions to geopolitical developments are often rapid and uneven and can quickly reverse as new information emerges. Historically, early price movements have often reflected uncertainty and investor risk reduction rather than a settled view on long-term economic impact, with markets ultimately moving back to focusing on fundamentals.
What this means for diversified portfolios:
Diversified portfolios are constructed with the expectation that periods of uncertainty and volatility will occur. By spreading exposure across different asset classes, regions and sectors, portfolios are better positioned to absorb the impact of individual events, including geopolitical shocks. In practice, this means that while some assets may be more sensitive to rising geopolitical risks, others are designed to provide resilience during periods of stress. Attempting to respond to rapidly changing headlines or to time markets during uncertain periods can increase the risk of poor long-term outcomes. Over time, investment returns have tended to be driven primarily by underlying economic fundamentals rather than short-term geopolitical developments.
Our approach:
We remain focused on long-term investment objectives, supported by well-designed asset allocation and proactive risk management with proper diversification. We continue to monitor relevant economic and market indicators (including developments in energy markets and inflation) while avoiding kneejerk positioning.
Periods of geopolitical tension are not new, and markets have navigated similar episodes many times in the past. While uncertainty is currently elevated, multi-asset portfolios are designed with this in mind. History suggests that maintaining discipline and a long-term perspective is more effective than reacting to periods of heightened uncertainty.
Important information
The information in this document does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. Investors should be aware that the price of investments and the income from them can go down as well as up and that neither is guaranteed. Investors may not get back the amount invested. Past performance is not a reliable indicator of future results.