Israel–Iran conflict rattles markets: What it means for your investments

Key points:

• Geopolitical uncertainty from the Israel–Iran conflict has sparked market volatility, significantly impacting oil prices and equities.
• Investors should monitor inflation and central bank responses closely, as sustained high oil prices could affect economic stability.
• Maintaining disciplined, defensive investment strategies—avoiding panic, using dollar-cost averaging, and strategic rebalancing—is crucial during this period.

Markets fell and oil surged after the dramatic military escalation between Israel and Iran. How should investors navigate this uncertain environment?

Missiles, markets, and investor nerves

It started before dawn on June 13th. Explosions echoed through the skies over Iran, shattering the fragile calm that had settled over global markets. As Israel launched airstrikes on Iranian nuclear facilities, and missiles rained down in retaliation on Israeli cities, panic rippled across trading floors from Tokyo to New York.

Global equities tumbled, oil prices soared, and volatility measures surged in one of the sharpest market reactions since the early days of Russia’s invasion of Ukraine.

For investors, such geopolitical crises can bring anxiety and uncertainty. It's natural for market turmoil to trigger strong emotional responses, such as fear or panic, often leading investors to make impulsive and detrimental decisions. Being mindful of these psychological tendencies can help you maintain perspective and stick to your strategic plan. This guide outlines what the latest Middle East flare-up means for your investments, focusing on managing risks, maintaining discipline, and strategically positioning your portfolio during uncertain times.

What’s going on? A rapid descent from shadow war to open confrontation

After years of covert sabotage, cyberattacks, and proxy wars, the Israel–Iran conflict has exploded into overt military hostility. Triggered by concerns over Iran’s nuclear enrichment activities nearing weapon-grade levels, Israel targeted Iranian nuclear sites and key military installations—including the strategically critical Natanz and Esfahan nuclear facilities—killing senior Iranian scientists and military figures.

Tehran’s swift missile retaliation into Tel Aviv marked an immediate escalation. Diplomatic efforts collapsed overnight, heightening fears of a broader Middle East war, with potential involvement from the US, Saudi Arabia, and others looming ominously.

Unlike past skirmishes, this conflict is direct, deadly, and overt—placing investors in uncharted territory.

How are markets reacting? Classic risk-off drama unfolds

The response was immediate and textbook. Investors fled riskier assets:

• Global equities: The S&P 500 fell 1.1%, the Dow was down 1.8%, and European and Asian indices mirrored these declines.
• Oil markets: Brent crude jumped 7% overnight to USD 73 per barrel, its sharpest rise since the Russia–Ukraine invasion, fueled by fears of supply disruption through the crucial Strait of Hormuz.
• Volatility spike: The VIX—often called the market’s "fear gauge"—surged past the critical 20-point anxiety threshold, jumping 16%.

At the sector level, clear battle lines formed:

• Winners: Energy giants (ExxonMobil +2.2%), major defence contractors (Lockheed Martin +3.7%), cybersecurity stocks, and gold miners benefited as geopolitical risk premiums returned.
• Losers: Airlines and travel stocks (Delta and United Airlines down 4–5%) suffered as rising fuel costs and security concerns stung investors.

Likely market implications: Inflation, interest rates, and global economic ripple effects

The most serious economic threat from this conflict lies in its potential to reignite inflation through sustained high oil prices. Recent attacks on Iranian oil facilities in Tehran and Iran’s critical South Pars gas field intensified market anxieties significantly. Analysts anticipate even sharper oil price increases, potentially driving crude above USD 100 per barrel if tensions worsen.

The Strait of Hormuz remains a critical chokepoint, through which about 20% of global oil supply flows. If Iran blocks this route—even temporarily—prices could surge dramatically. This could stall central banks' easing efforts, maintaining higher interest rates longer, negatively impacting stock valuations, especially growth-oriented tech sectors.

Europe and Asia are particularly vulnerable. Asian economies, heavily reliant on Middle Eastern oil, risk significant disruption, potentially pulling global growth lower. Europe, still fragile from a recent energy crisis, could face renewed economic pressures. Even the US, largely energy self-sufficient, would feel repercussions through interconnected global markets and potential inflation spillovers.

Investors must therefore closely monitor central bank responses. Persistently high oil prices could stall expected interest-rate cuts by the Federal Reserve and European Central Bank, prolonging market volatility.

What does it mean for your portfolio?

Investors face three credible scenarios:

1. Base case: Conflict contained, volatility temporary

Markets stabilise after initial jitters, recovering modestly as investors regain confidence. Energy prices moderate, defensive assets remain resilient, and overall investor sentiment gradually improves.

2. Downside scenario: Regional war escalates, oil shock deepens

Markets experience significant declines as oil surges above USD 100 per barrel, inflation fears return, central banks reconsider rate cuts, and global stagflation risks rise, leading to prolonged uncertainty and market pressure.

3. Upside scenario: Rapid diplomatic breakthrough

Markets see a quick and robust relief rally in beaten-down sectors, defusing inflation pressures and restoring broad investor optimism, supporting recovery across equities and risk assets.

To balance these scenarios, investors could consider maintaining a modest defensive tilt—focusing on high-quality, resilient stocks and commodities that can weather volatility, while remaining ready to benefit from a market recovery should peace swiftly return.

Learning from past market shocks

Investors have navigated geopolitical crises before, such as the 1970s oil embargoes, the Gulf War of 1991, and Russia's invasion of Ukraine in 2022. Each episode initially caused severe market reactions—sharp oil price spikes, equity market sell-offs, and increased volatility—but each time markets eventually stabilized and recovered. Historical precedent shows that disciplined, long-term investors who maintained their positions and strategically bought into market dips have typically emerged with stronger portfolios over time.

Risks and investor strategies: Navigating uncertainty

Strategic patience remains vital during times of heightened uncertainty. Investors should closely monitor the following key risks:

• Oil chokepoint crisis: Strait of Hormuz disruption risks dramatic price spikes, inflation, and economic destabilisation.
• Regional escalation: Further attacks could significantly widen economic impacts.
• Cyber warfare risk: Iranian cyberattacks could sharply increase global panic.

Markets inevitably face geopolitical storms. Disciplined, long-term investors who remain calm and manage risks wisely typically emerge stronger and more resilient. Here's how to respond:

• Stay calm: Resist panic selling.
• Rebalance defensively: Prioritise gold, staples, healthcare.
• Systematic investing: Dollar-cost averaging lowers entry cost.
• Monitor closely: Track oil prices, diplomatic signals, central bank moves.

Remember: "Markets panic faster than they think—but recover quicker than they fear."

Ultimately, while geopolitical tensions can create short-term market turmoil, historical evidence consistently underscores the resilience of markets over the long term. As an investor, your greatest tool is a disciplined approach—staying informed, remaining calm, and focusing on your long-term investment goals rather than reacting impulsively to temporary shocks. By adhering to prudent strategies and managing risks wisely, you can navigate this uncertainty and safeguard your financial future.