A Private Investor wakes up to the Iran Crisis
Wise Words
I am beginning to lose count of the market crashes we investors have had to endure over the last few years – Brexit, covid, the Ukraine invasion, Liz Truss’ premiership, and ‘Independence Day’ to name a few of the more memorable ones. And now, here comes another – the invasion of Iran by the US and its ally Israel.
On each occasion I become aware of a sense of powerlessness. The market is in a panic and is making me poorer by the hour as it rushes to dump the assets I own. It’s easy to feel stupid. I have to remind myself that I am probably no more stupid than I was last week. I am once again the mouse trapped between the front paws of a cat. I suspect that any movement just now risks making my situation worse, but I’m aware that I may be wrong in thinking that, while desperately trying to work out what’s going on. Have the events of the last few days obviously weakened the investment case for any of the assets I own? How long am I likely to have to sit here, and what opportunities might arise when the cat finally loses interest and wanders off?
What has happened up to this point?
Iran’s Islamist regime has been in power for almost 50 years. It is authoritarian, inefficient and deeply unpopular. Among Iran’s 90 million population, as many as 80-90% support an end to the regime and a return to secular democracy.
Iran’s economic output of nearly $500 billion, mainly oil-based, is around 10% smaller than Israel’s. Economically, Iran’s is a relative minnow on the world stage, roughly one-eighth the size of the UK’s economy and one-tenth that of Germany. And it has been shrinking. In real (inflation-adjusted) terms, Iran’s average city dweller is poorer by a quarter than 20 years ago and its average country dweller’s income has shrunk by half over the same period.
Iran’s government supports ‘proxy’ militias in the region, which are widely regarded as terrorist organisations – Hamas in Gaza, Hezbollah in Lebanon, and the Houthis in Yemen.
The west has long been nervous about the prospect of a ‘pariah’ state such as Iran developing nuclear weapons, which it has clear ambitions to do. The Obama administration negotiated a treaty (the Joint Comprehensive Plan of Action) under which Iran would surrender its nuclear programme in return for a range of concessions, mainly sanctions relief. Mr Trump considered this treaty too lenient and scrapped it early on in his first administration.
In June last year Operation Midnight Hammer ‘completely and totally obliterated’ Iran’s key nuclear enrichment facilities, as President Trump put it, though the Iranian government and independent enquiries suggested that far more limited damage had been caused, and that possibly Iran’s nuclear enrichment programme had been set back by as little as ‘a few months’.
Iran and the US had been actively negotiating in the weeks before the strikes on February 28th (is there a pattern emerging that US strikes on other countries always begin on Saturday mornings?), while the US had been assembling an armada in the region. It’s possible that military strikes were intended all along.
What do the US and Israel actually want?
It has taken a few days for anything like a clear articulation of the war aims to emerge. Essentially, the stated war aims are to de-fang Iran. This means to ensure that Iran can NEVER build a nuclear weapon. Mr Trump now says he’s worried that Iran will use its conventional weapons, chiefly ballistic missiles to ‘defend’ a renewed weapons programme, so these would not be allowed under a settlement. Iran must also cease to support its regional ‘proxies’. An advantage of these war aims from the US point of view is that Mr Trump can declare them to have been achieved at a time of his choosing. As financial markets would almost certainly rally after such an announcement, there is a risk to being significantly out of the markets as the strikes continue, bearing in mind that asset classes seen as vulnerable have taken a significant hit already.
Though regime change has been mentioned as desirable many times, it has not been given as a specific goal of this campaign, aptly named ‘Epic Fury’. Like all other authoritarian regimes, Iran has done its utmost over the last 47 years to entrench its position and violently prevent opposition from taking hold at any level of society. Mr Trump seems to imagine that the bombing campaign will weaken the regime to the point where the people can rise up and seize power. This may or may not happen. While there is widespread opposition, it does not appear to be well-organised or strongly led. Recent national protests against the economic malaise were met with barbarous brutality. An unknown number of protestors, running probably into many thousands were killed. The murderous Revolutionary Guard is still there. People may be reluctant to try again so soon. If regime change occurs, Mr Trump can take the credit. If it doesn’t, he can blame the people of Iran. He doesn’t have to keep his bombing campaign going until the regime is overthrown.
How has Iran responded?
Iran’s response has been for me the most surprising turn of events so far. They could have sat tight for a while, hoping to gain sympathy and support against the US aggressor. Instead they have clearly decided to ‘go for broke’, aiming to curtail oil and gas production in the four kingdoms of Kuwait, Bahrain, Qatar and the UAE, as well as in Saudi Arabia itself, while disrupting distribution through the strategically vital Strait of Hormuz. There can be no doubt that whatever Iran says, its aim is the fastest and most devastating damage to the world economy that is within its power to achieve. Presumably Iran’s aim is to maximise the pressure on US President Trump from his friends in the Gulf, who never wanted military action and tried to talk Trump out of it, as well as the many millions around the world, (including most vitally for Trump himself the electorate at home) who are already struggling economically, and have no appetite whatsoever for the sharply lower growth rates and sharply higher inflation that would inevitably ensue should Iran’s retaliation succeed. As the saying goes, Trump always Chickens Out (TACO). Will he chicken out this time?
My guess is, he won’t, at least not yet, but he has no time to lose. With every day that goes by, the prices of oil and gas rise further, and the prospect of significant economic dislocation grows. I’m guessing that the US and Israel will do their utmost to destroy Iran’s weapon-launching capacity over the next few days, before declaring a total victory, whether the regime is still there or not. But much could go wrong.
How has the stock market reacted?
Though the last couple of days have been anything but pleasant, the falls so far have been relatively modest and largely follow the unfolding narrative of sharply higher fuel costs leading to another inflation spike, interest rate rises and potentially a fully-blown cost-of-living crisis.
Gold has benefitted, but not much, remaining several percentage points below its January peak. The share prices of the oil producers have risen as you would expect, though the price of Centrica, a gas distributor, has fallen.
The list of losers is much longer. At the sharp end, airline companies are losing money by the day, as are associated companies in the travel and hospitality sectors. Even if the conflict ends soon, it’s hard to assess the potential long-term damage to the reputation of the Gulf states as safe, sunny destinations for holidaymakers and expats., or how long it would take that business to return to pre-February 28th levels.
Beyond that, the market is selling off companies such as retailers that would struggle in a slower economy, or others like commercial property companies that would be hurt by higher interest rates. Housebuilders, relying on consumer confidence and lower interest rates, are being set up for a double dose of pain. Construction companies could expect lower levels of activity in a weak economic environment. Life assurance companies, seen as vulnerable to higher interest rates, have been sharply de-rated. Rather to my surprise, the clean energy companies have gone down too. One might have thought that a situation such as the present one would be positive for them, emphasising the benefits of electricity as a locally-sourced fuel, less vulnerable to the chill winds of global geopolitics, but investors are looking instead at the prospect of higher borrowing costs for them.
People also take profits on assets that have been performing well, just to raise cash.
After a strong run, investments in Emerging Markets are selling off.
What will the central banks do?
For now, they should do nothing, because the conflict is too new and no pattern has emerged.
It’s true that when inflation rises, central banks tend to raise interest rates, but there are situations in which that would be a mistake, and this is one such situation. Classic inflation is caused by ‘too much money chasing too few goods’ in an over-heating economy. But that’s not what would be happening here. Prices would be rising in response to an external shock unrelated to domestic demand. The effect of a rise in oil and gas prices is to take money out of everyone’s pockets (except the providers of the oil and gas). And so it’s hard to justify raising interest rates, which also takes money out of people’s pockets, as the appropriate antidote to an exogenous oil price shock. This may explain why, during the last energy crisis following the invasion of Ukraine, the Bank of England raised its base rate to just 5.25% despite inflation rising to over 11%.
Conclusion
This is a good opportunity to review my investment portfolio, asking of each asset the same question – have the events of the last few days weakened the longer-term investment case for this asset? Up to this point I haven’t spotted any new weaknesses, but of course it’s much too soon to be sure.
And there will be opportunities in due course. The disruptive potential of the conflict is such that it’s hard to imagine an already very unpopular US President prolonging it beyond a few weeks at the outside – but it’s possible that the US may lose the initiative, and find itself unable to withdraw. If the war is short, it is unlikely to have a bearing on the courses of interest rates, so it’s possible that the sell-off in interest-rate sensitive assets may be overdone.
Whatever the outcome, the course of US policy and the ideas that underlie it remain extremely worrying. The war is illegal as it was not ratified after a debate in Congress, nor was it discussed at the United Nations, or anywhere else. Despite this, Trump and his team expect all other countries to give the US their wholehearted support and have been aggressively critical of anyone who has declined. As Sir Keir Starmer pointed out, it is impossible to impose ‘regime change from the skies’, and a recurring lesson of the current century has been that deposing tyrants (Saddam Hussein, Gaddafi, the Taliban) is easier than replacing them with stable, broad-based governments, which US-led coalitions have failed to do every time they have tried.
Tony Yarrow
March 3rd 2026
Please note – this article contains the personal opinions of Tony Yarrow, a private investor, and is not intended as financial or investment advice.
