Market Commentary: The Iran Conflict — What It Means for Investors

Over the weekend, coordinated strikes by the US and Israel on Iran sharply increased uncertainty in global markets. While the timing may have surprised some, the possibility of US involvement had been widely anticipated. Following last summer’s pre-emptive strikes on Iran’s nuclear facilities — and the very visible build-up of US military resources in the region — the mood in markets had increasingly shifted from “if” to “when.”

The situation is already extending beyond Iran’s borders, with retaliatory action across the region raising questions about how far this could escalate and how long it may last. A key concern is the Strait of Hormuz, which Iran controls. This narrow strip of ocean is critical for global energy markets, carrying roughly 20% of the world’s oil supply and around 90% of oil exports heading to Asia. A prolonged disruption here could have potential global economic impact.

What could happen to Oil prices

Oil markets are highly sensitive to both real and perceived supply risks. At this stage, there are four broad scenarios that could shape energy prices.

The first and best case is a stable supply environment, where oil flows continue uninterrupted and OPEC+ increases production to offset potential risks. In this case, prices could stabilise or even ease slightly.

The second scenario involves a localised disruption, such as direct damage to Iranian oil facilities. This could lead to a modest rise in prices, although additional output from OPEC+ members could help cushion the impact.

A third possibility is wider regional escalation targeting oil infrastructure, similar to the 2019 drone attack on Saudi Arabia facilities. This could cause a sharper spike in prices, though history suggests such moves may prove temporary if facilities are repaired quickly.

The most severe scenario would be a significant disruption to the Strait of Hormuz. Even without a formal blockade, increased shipping risks or insurance constraints could restrict global supply and push prices materially higher. While this would have the greatest economic impact, it is not our base case.

If oil prices were to remain elevated for a prolonged period, that would likely feed into higher inflation. Energy costs filter through transport, manufacturing, and household bills. Central banks might then feel pressure to keep interest rates higher for longer, which could weigh on economic growth and equity valuations.

Energy-importing economies would generally feel this most acutely, while energy-producing countries and companies could benefit from stronger revenues.

Importantly, history suggests that unless there is a sustained physical constraint on supply — such as a major Strait disruption — oil price spikes tend to be relatively short-lived with markets normalising as perceived risks fade.

What Does This Mean for Portfolios?

Unsurprisingly, equity markets have reacted with increased volatility. Global indices have fallen, particularly in energy-importing regions like Europe, Japan, and parts of Asia.

However, history tells us that markets often overreact in the short term to geopolitical events.

Looking back at major conflicts — from World War II through to Iraq, Afghanistan, and more recently Russia–Ukraine — markets typically sell off initially as uncertainty rises. Over time, though, returns tend to be driven far more by fundamentals: earnings growth, inflation, and monetary policy. Broad equity indices typically experience short-term weakness, but over a six- to twelve-month horizon, returns often normalise, and over multiple years, developed markets have historically delivered positive outcomes.

Certain sectors may also respond differently. Energy producers, defence companies, and precious metals often benefit from geopolitical shocks, while cyclical sectors and energy-dependent businesses may face pressure. This is why diversification matters as portfolios are better positioned to navigate these fluctuations without compromising long-term goals.

Bond markets have also reflected a more cautious tone. Government bonds initially benefitted from safe-haven demand, pushing yields lower. However, rising energy prices introduce upward pressure on medium-term yields through potential inflation, while credit spreads for lower-rated corporate bonds may widen as risk premia adjust. Again, the impact varies by region, with energy-importing economies more exposed than energy-independent ones like the US.

Our Approach

It’s worth noting that we came into this period with a degree of caution already in place. Broad equity markets have been trading at elevated valuations for some time, and as a result, our equity exposure has reflected that backdrop. Where we felt valuations were stretched, we were careful not to take on unnecessary risk or assume strong market conditions would simply continue.

On the fixed income side, our bond allocations are positioned defensively. We currently favour short-duration, high-quality credit. In simple terms, that means:

• Short duration helps reduce sensitivity to rising interest rates, which can occur if inflation expectations increase.
• High credit quality provides resilience if economic conditions soften and credit spreads widen.

If inflation were to move higher because of sustained energy price pressures, shorter-duration bonds should, in theory, be less impacted than longer-dated government bonds. That positioning is deliberate.

However, more broadly, our approach incorporates lessons from history and current market dynamics:

1. Discipline through uncertainty: Sharp market volatility is expected; we resist the urge to react impulsively to headlines.
2. Diversification: Portfolios are structured to manage risk across geographies, sectors, and asset classes, acting as a buffer against short-term shocks.
3. Long-term focus: Staying invested allows compounding to work over time, rather than attempting to time the market based on fear or uncertainty.
4. Opportunistic rebalancing: While we do not speculate, market dislocations may present attractive valuation opportunities for patient investors.
5. Ongoing monitoring and risk management: We continually assess portfolio exposures, economic indicators, and geopolitical developments to ensure alignment with each client’s objectives and risk tolerance.

Geopolitical events can feel dramatic in the moment however history has shown markets are resilient. Investors who maintain a long-term perspective, stay diversified, and avoid panic-driven decisions are typically best positioned and most likely to preserve capital and capture future growth.

This article is intended for information only, and does not constitute advice.

Wise Investments Limited is authorised and regulated by the Financial Conduct Authority, FCA no. 230553.