Escalating tensions in the Middle East have understandably prompted questions from investors, following US–Israel military action against Iran and subsequent retaliation. While these events are serious and fluid, history suggests markets can absorb geopolitical shocks over time. While the situation is evolving quickly, here’s what we know right now - and some important considerations for investors.
What has happened and how significant is this conflict?
The United States and Israel have launched joint military strikes on Iran, resulting in the death of Supreme Leader Ayatollah Ali Khamenei and approximately 40 senior regime officials. Iran has responded with missile and drone strikes across the Gulf region, including attacks affecting commercial shipping and infrastructure in areas such as Dubai, Doha and Abu Dhabi — locations that have typically been spared in previous Middle East conflicts.
Iran’s security leadership has ruled out negotiations at this stage, and President Trump has indicated the military campaign could last up to four to five weeks. This represents a major escalation in the Middle East, and the risk of further regional spillover remains elevated.
Which sectors and asset classes are most affected?
Market reaction has so far been mixed, reflecting both heightened geopolitical risk and investor caution. Global equity markets have diverged. As at Wednesday morning (NZ time), US equity markets closed only slightly lower since the weekend, although has seen large intra-day moves on news flow, while European markets declined more sharply, with the Stoxx 600 index down over 4.5% over the same period.
Energy and defence stocks have been among the beneficiaries, alongside traditional safe-haven assets such as gold, US Treasury bonds, and the US dollar. In contrast, airline and hotel stocks have come under pressure due to rising oil prices, airspace closures, and attacks on tourism-related infrastructure across the Gulf.
At the time of writing, market volatility has increased, with the “fear gauge” VIX index spiking above 25, its highest level in over three months. Markets remain sensitive to further developments, particularly if the conflict widens or significantly disrupts Gulf oil infrastructure.
What is the impact on energy markets?
The energy market impact has been significant due to Iran’s proximity to the Strait of Hormuz - a critical chokepoint through which around 20% of the world’s oil and gas supply passes each day.
Brent crude oil prices surged above US$80 per barrel, although this was less severe than initially feared. Tanker traffic through the Strait of Hormuz has largely halted, with insurers withdrawing war-risk cover for vessels operating in the Persian Gulf, effectively closing the waterway. In a recent development, Trump announced the US will provide insurance for trade through the gulf and, if necessary, the US Navy will begin escorting tankers through the Strait of Hormuz. The announcement has calmed markets, with oil prices pulling back from recent highs.
Natural gas prices have also risen after Qatar suspended LNG production at the world’s largest export facility, which supplies roughly 20% of global LNG. While OPEC+ has agreed to increase production, many member countries have limited spare capacity, and any additional supply still depends on access through the Strait of Hormuz.
What should investors focus on?
Geopolitical events are inherently unpredictable, and history suggests markets can be more resilient than expected. When the US and Israel conducted a 12-day military campaign against Iran last year, markets largely absorbed the shock. The key difference this time is the potential for a longer conflict with the stated aim of regime change.
Since 1940, historical data shows the S&P 500 has been higher roughly 80–85% of the time in the 12 months following major geopolitical crises. Short-term volatility can be unsettling, but its impact on long-term returns is often limited.
Despite recent event driven volatility, the corporate earnings backdrop remains encouraging. New Zealand's reporting season closed on a positive note, with the majority of results meeting or beating expectations and several companies lifting forward guidance.
Globally, S&P 500 earnings growth of 14.2% (year-over-year) for Q4 marks the fifth consecutive quarter of double-digit growth. This solid earnings foundation is a timely reminder that short-term volatility rarely reflects the underlying health of well-positioned businesses.
For investors, the key considerations remain unchanged:
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Stay diversified: A well-diversified portfolio across asset classes and geographies remains the most effective protection against event-driven volatility.
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Avoid reactive decisions: Attempting to time markets around geopolitical events is exceptionally difficult and often counterproductive.
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Focus on long-term goals: Short-term market movements driven by geopolitical developments seldom change the long-term return potential of a well-constructed portfolio.
Maintaining discipline and a long-term perspective remains the most reliable path to achieving investment objectives. As events continue to unfold, our team is monitoring markets closely and managing risks to support our clients through changing conditions.
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