The geopolitical landscape shifted over the weekend following coordinated U.S. and Israeli strikes resulting in the death of Iran’s Supreme Leader. While military action of this magnitude naturally dominates headlines, tensions in the region have been building for several months. As a result, although the scale of the strikes is significant, the escalation has not come as a complete surprise to financial markets, which have been pricing in elevated regional risk for some time.
The stated intent of the US and Israel to dismantle the regime suggests an ongoing period of friction rather than an overnight resolution. However, history proves that the most expensive mistake during a geopolitical shock is a permanent reaction to a temporary disruption. Whilst the developments over the weekend represent a significant geopolitical and humanitarian crisis, history shows that such short-term volatility often presents valuable entry points into the market for investors, as they typically recover quickly and move on to new highs.
In the near term, we are seeing heightened geopolitical noise in the form of retaliatory activity across parts of the region and precautionary adjustments to commercial flight routes. Markets across Asia and emerging markets closed lower, with the Nikkei down 1.3% and the Hang Seng sliding just over 2%. As we look toward the Western open, U.S. futures indicate a cautious start, with the S&P 500 futures down 1.60%. Similarly, European markets have opened under pressure; at the time of writing, the Eurostoxx is down 2.5%, while the UK’s FTSE 100 has proved slightly more resilient, down 1.5%.
The most critical economic variable is the Strait of Hormuz, the world’s most important energy chokepoint, through which roughly 20% of global oil and LNG flows each day. Although it remains officially open, a “war premium” is naturally being baked into oil prices. Brent crude prices jumped almost 10% this morning, climbing to around $80 per barrel. Precautionary pauses by some tanker operators and shipping nations have already stopped traffic. Iran has historically used the Strait as strategic leverage, but a full closure would be economically self-damaging, as it would also restrict its own energy exports.
However, it is vital to note that the global energy market is far better buffered today than in previous decades, thanks to high strategic reserves and diversified non-OPEC production. On Sunday eight OPEC+ nations including Saudi Arabia and Russia proactively agreed to further increase April output, a move that could help anchor oil prices.
While these moments can feel unprecedented, history provides valuable perspective.
• The Gulf War Aug 1990: The S&P 500 fell 15% in the months of uncertainty following the invasion of Kuwait and oil prices roughly doubled. However, the moment “Operation Desert Storm” actually launched in January 1991, the market staged a massive relief rally as the range of outcomes narrowed. When the ground war ended in February 1991, the S&P 500 had already recovered all of its war‑related losses.
• Iraq War Mar 2003. Whilst markets fell in the run up the invasion of Iraq in March 2003. The market recovered swiftly and global markets were up over 20% in sterling terms by the end of the year.
In these cases, the market bottomed when the event began, not when it ended. Initial shocks tend to be a poor indicator of long-term returns. Markets are remarkably efficient at pricing in tension and refocusing on the broader economic cycle.
We anticipate a period of short-term volatility as the situation unfolds. While escalation risks exist, markets are currently pricing probabilities not worst-case outcomes. Unless energy supply is materially disrupted for a sustained period, geopolitical events alone rarely derail long-term market progress. Our portfolios remain highly diversified, providing a strong foundation to absorb short-term fluctuations in markets.
We are maintaining a disciplined approach, looking through the immediate regional instability. We remain steadfast in our commitment to your long-term investment objectives. Our team continues to monitor the evolving situation closely and stands ready to adjust portfolios accordingly when appropriate.
Kate Mimnagh, Portfolio Economist