Iran conflict market update – key questions for investors remain

The ceasefire between the US and Iran appears to have broken down, with both sides engaging in retaliatory strikes despite US president Donald Trump's declaration last month that hostilities had ended. Speaking at this week’s Nato Summit in Turkey, Mr Trump said an interim deal aimed at ending the war with Iran is “over” and that American forces would probably launch further strikes.

Investor sentiment had been buoyed in recent weeks by reports of an interim agreement and ceasefire, but the foundations of any lasting truce always appeared fragile. As tensions rise again, Iran seems increasingly unlikely to reduce its influence over the Strait of Hormuz, raising the risk of renewed disruption to global energy markets and adding another layer of uncertainty for investors.

Strait of Hormuz returns to the spotlight

Unsurprisingly, oil prices have moved higher as concerns about shipping through the Strait of Hormuz return to the forefront of investors' minds. With a significant proportion of the world's energy supplies passing through the waterway, geopolitical risk is once again becoming a key driver of market sentiment.

The critical issue is that any further escalation in the conflict – particularly one that disrupts traffic through the Strait of Hormuz – could drive energy prices higher and create wider supply-chain disruption. This comes at an uncomfortable moment for policymakers, with economic growth already slowing and inflation remaining stubbornly persistent. A fresh energy shock would further complicate the outlook for central banks, forcing them to balance weakening economic activity against the risk of inflation becoming more deeply entrenched.

We continue to believe tensions across the region will remain elevated, while a broader and more durable resolution is likely to remain elusive given the range of geopolitical interests involved. Investors will therefore be watching closely for signs that the conflict could widen or become more prolonged.

Questions for markets

Several key questions remain. Will oil prices return to levels that reignite inflation concerns? Could central banks be forced to reconsider the path of interest rates? Which sectors are most vulnerable to disruption in global shipping and supply chains? And will markets begin to price in a more pronounced slowdown in global growth?

These questions are unlikely to be answered quickly. Instead, they are likely to influence market sentiment and investment decisions for months ahead.

If oil prices remain elevated for an extended period, the effects could ripple throughout the global economy, increasing fuel, transport and potentially food costs. With inflation already proving more persistent than many central banks had anticipated, policymakers may be forced to reassess their outlook, strengthening the argument for keeping interest rates higher for longer.

For now, markets appear to be pricing in slightly weaker global growth, higher energy costs and increased geopolitical risk, but only to a limited extent. Investors have become accustomed to a near-constant stream of geopolitical shocks, meaning many events are increasingly viewed as part of the new normal rather than catalysts for a significant market repricing.

Diversification remains key

Geopolitical crises are impossible to predict and even harder to navigate, which is why diversification remains one of the most effective tools available to investors.

A well-balanced portfolio spread across different asset classes, regions and sectors can help cushion the impact of market shocks when geopolitical events unsettle financial markets. 

Rather than trying to anticipate every twist and turn in world affairs, a diversified portfolio capable of weathering a wide range of economic and political outcomes is the best approach.