March 2026 | 
5 min read
The Middle East erupted in conflict over the weekend of 28 February following joint US-Israel air and missile strikes on Iran. In response, Iran fired missiles at a clutch of neighbouring countries including Saudi Arabia, the United Arab Emirates, Qatar, Israel, Bahrain, Kuwait, Jordan, Oman, and Iraq, as well as Cyprus, which hosts British forces.
Unsurprisingly, oil prices have spiked, share markets have weakened while government bond values strengthened, and the gold price, which has been on a tear over the past year, took another step forward in price.
As to where financial market judgments may land in the coming weeks, assuming the war lasts for some time, we may draw some learnings from last June’s 12-day clash between Israel and Iran, and Russia’s 24 February 2022, invasion of Ukraine.
Like now, share markets initially weakened, but later stabilised as investors concluded that the conflicts would be contained.
Energy market impacts
That said, disruptions to global energy supplies are the most worrisome immediate economic consequence of the current conflict. Iran and its Arabian Gulf neighbours astride the Strait of Hormuz, one of the world’s most important oil choke points.
About 13 million barrels a day of crude oil transit the Strait of Hormuz, representing around 31% of global seaborne crude flows.1 Moreover, Iran’s neighbours, such as Qatar, are some of the world’s largest gas suppliers, with roughly 20% of liquefied natural gas (LNG) exports passing through the Strait.2
Shipping through the narrow waterway appears to have fallen drastically and no immediate replacement gas sources are available raising the possibility of price spikes for Asian and European customers. A bad economic scenario would be the potential for inflationary pressures to rise again, weakening the world’s economic pulse.
OPEC increasing oil supply…
Oil producers are very mindful of the harm that would follow a period of disrupted supply and the Organisation of Petroleum Producing Countries (OPEC), and some non-OPEC nations, agreed on Sunday 1 March, to add a little over 200,000 barrels a day of supply.3
Saudi Arabia, Iraq, Kuwait and the United Arab Emirates had already begun increasing oil shipments in the previous month, mirroring the export ramp up seen during last June’s US strikes on Iran’s nuclear facilities.1
This good news needs to be tempered by the fact that the increased supply will need to find alternative and more expensive ways to reach global customers if passage through the Strait of Hormuz remains severely restricted.
…and oil prices can move in unpredictable way
Investors may also recall what happened to oil prices over the course of the 1980-1989 Iran-Iraq war as the two protagonists attacked each other’s energy infrastructure and tanker fleets came under fire.
Despite being one of the longest and most destructive oil region wars in history, the period coincided with falling, not rising oil prices. Initial supply fears quickly gave way to weak demand, rising non-OPEC production and the loss of OPEC pricing discipline with prices declining over 1982-1985, culminating in the 1986 oil price collapsing to below US$10 a barrel.2
The episode shows that geopolitical conflict alone does not sustain high oil prices unless it coincides with tight global supply and strong demand. Instead, there was a powerful global response from new production outside the conflict zone, higher output from other OPEC members, and policy liberalisation in the US oil market, which increased production and pushed prices down.
Portfolio positioning
We are disciplined investors with a long-term focus and are mindful about short term reactions to geopolitical events. We recognise that we can’t change what governments and political leaders do and instead focus on controlling the controllables.
Geopolitical events are incorporated into our asset allocation process through their impact on growth, inflation, policy settings, and market pricing. Rather than trying to predict political outcomes, we focus on how different scenarios affect asset class behaviour and alter our positioning dynamically to reflect this.
Consequently, diversification remains a cornerstone of our investment approach. By spreading investments across various asset classes, it means that our clients’ portfolios are not overdependent on strong returns from a handful of assets for performance. Instead, returns are accumulated from multiple sources.
Furthermore, in volatile periods, better returns from some parts of portfolios, can potentially offset weaker returns from other parts, which helps to smooth returns.
Exposure to alternative investments, like insurance related investments, continue to provide portfolios with an attractive source of diversification given that their performance is not related to share market performance.
Our allocation to real assets via unlisted infrastructure, and unlisted property investments provide diversification benefits, along with long-term, stable and predictable cashflows often linked to movements in inflation. Likewise, private equity remains an important part of select portfolios owing to its diversifying attributes and strong long-term return potential.
We continue to hold allocations to traditional bonds as part of our diversified approach to investing and are also currently finding compelling opportunities in income-focused credit strategies to compliment these allocations as companies’ financial metrics remain reassuring.
In our share portfolios, we have a relative preference for non‑US markets where we see more attractive valuations.
Having a dedicated in-house derivatives team capability also means we’re well placed to capture opportunities that present across various markets, whether they be in commodities, share market indices, or even through protection strategies where we believe market risk is unlikely to be rewarded.
We are strong advocates of active portfolio management because markets move and change, and psychological factors can cause hasty actions by some market participants. This creates opportunities for those who can look through events and buy good assets at attractive prices.
Positions like those discussed in this note provide high levels of diversification, and, in our view, form important parts of well-managed portfolios.
We have succeeded in navigating our clients’ investments through past disruptive episodes and are confident that the skills, knowledge, and judgment across our investment team will prove up to the challenge ahead.
Sources:
1 Markets brace for impact following U.S. military strikes against Iran
3 Ibid
4 Ibid
4 The double-edged crisis: OPEC and the outbreak of the Iran-Iraq war, by Avshalom Rubin, Middle East Review of International Affairs, Vol. 7, No. 4 (December 2003)
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