John Husselbee: “We are dealing with markets repricing uncertainty, not an economic shock”
The attacks by the US and Israel on Iran that began in the early hours of Saturday morning, and the subsequent retaliation on multiple Middle East countries, has further ratcheted up both geopolitical tension and market uncertainty. We can now expect increased volatility, especially in energy markets, as well as across other investment markets.
It is important to remember, however, that at this stage we are dealing with markets repricing uncertainty rather than an economic shock and its consequences. As one observer has put it: “This is a period of elevated risk – not yet evidence of lasting economic damage.”
The key variable to watch is oil. Energy prices are the main channel through which geopolitical events can feed into inflation and impact growth and central bank policy. The important distinction is between a temporary geopolitical risk premium and a sustained physical disruption to supply. History shows that markets are very good at adjusting quickly once risks stabilise.
It is also worth placing current events in a broader context. While headlines focus on the risk of a ‘hot’ conflict, the longer-term trend is towards a colder, more fragmented global environment. The world is becoming less synchronised, with old political alliances under strain or negotiation, and domestic politics have become polarised. This does not mean constant crises but it does mean markets are likely to remain more volatile than in the decade following the global financial crisis.
“Markets tend to focus on oil prices, which is pertinent in the case of Iran given the importance of the Strait of Hormuz to energy markets.
Geopolitical events are emotionally powerful but they rarely change long-term return paths unless they lead to sustained changes in inflation, earnings or growth.”
Against this backdrop, our message to investors remains consistent. First, diversification matters. Multi-asset funds and portfolios are designed for periods like this. Genuine diversification across asset classes, sectors, regions and investment styles helps absorb shocks that originate outside the economic cycle, including geopolitical events and commodity price swings.
Second, discipline matters. Geopolitical events are emotionally powerful but they rarely change long-term return paths unless they lead to sustained changes in inflation, earnings or growth. Reacting to headlines by making portfolio changes typically locks in losses rather than protects capital. As has often been said, ‘volatility is the price investors pay for long term returns’.
Read also: Understanding markets in times of conflict by Peter Wasko
Third, differentiation matters. In a more fragmented world, outcomes are increasingly uneven across regions, sectors and asset classes. Active asset allocation, valuation awareness and flexibility across equities, fixed income and alternatives are essential in navigating this environment.
In recent years, our approach has adapted deliberately to a more complex world in which it is now impossible to rule out potential trends or events because they are seen as outside of what is rational or possible. This means broadening diversification, maintaining discipline through market stress and building portfolios that are differentiated.
This positioning remains appropriate given the current conflict in the Middle East. Nevertheless, we continue to monitor developments closely – particularly energy markets and any signs the conflict could translate into sustained inflationary pressure or weaker growth.
John Husselbee is head of the Liontrust Multi-Asset team
Michaël Nizard & Nabil Milali: “We see three scenarios – chaos, war of attrition or regime change”
Previously, any mention of the closure of the Strait of Hormuz would have pushed Brent above $100 (£75) a barrel but the oil market has changed structurally. Oil production remains abundant thanks to American shale, growth in non-OPEC production and Gulf countries that now have alternative routes for exporting oil, bypassing the Strait of Hormuz. We now see three possible scenarios:
* Chaos (20%), similar to Libya after the fall of Gaddafi: Even if the Iranian regime falls, the vacuum could lead to civil war. If militias form, they could permanently disrupt access through the Strait of Hormuz or target oil facilities in the region, similar to the Houthi rebels playbook. In this scenario, persistently high oil prices brings risk of a new inflationary spiral, hitting risky assets and long-term government bonds.
* War of attrition (50%), lasting several months before US de-escalation: The Iranian regime is more resilient than the US and Israel expect. Regime change without ground intervention is tough and Donald Trump has ruled out invasion, given the risk of US casualties. Add to that the fact the Iranian command is no longer centralised with units acting more or less independently.
If the conflict becomes bogged down, even if the regime’s structure remains in place, Trump will be tempted to end hostilities by declaring victory regardless, pointing to the killing of the Supreme Leader and the destruction of Iran’s military capabilities.
Indeed, the US president will not want to risk a further surge in petrol prices in the run-up to the mid-term elections and will favour a return to the status quo with a continuation of the stand-off with Iran, but at a lower intensity. In this scenario, crude oil prices would fall back without returning to pre-crisis levels. That should be enough to fuel a renewed appetite for investment risk.
* Regime change (30%), whether towards a democratic transition or another, more palatable authoritarian regime: That would mark a turning point in the history of the region. The US would have won an important victory, isolating Iran from the rest of the Persian Gulf and further consolidating the Abraham Accords, with the project of a pan-Arab arc conducive to direct investment.
Beyond a decline in oil prices and renewed risk appetite, this would boost the region’s attractiveness for foreign investment. In this scenario monetary and fiscal policies remain as accommodative as ever across all major regions – the US, Europe, China, Japan and the UK. This scenario would favour equities and credit, with a preference for Japan and the emerging markets.
Given these scenarios, investors should stay overweight in resilience-related themes, such as defence, energy security and strategic autonomy.
Michaël Nizard is head of multi-asset & overlay, and Nabil Milali is a multi-asset portfolio manager, at Edmond de Rothschild Asset Management
Maurizio Carulli: “It is the average oil price over a given period of time that matters”
Oil supply and demand fundamentals until Friday had pointed at a surplus in 2026 – however, that is quickly changing as events in the Middle East play out. Recent weeks had seen the oil price rise from $60 a barrel (bbl) at the beginning of January to $72/bbl on Friday, with it climbing further on Monday to $80/bbl as markets factor in the increased geopolitical risk.
Depending on how, and for how long, the current military action will continue, the oil price will adjust quite quickly. So, if the situation will calm down over the next few weeks – as is well possible – the price is likely to revert to $60/bbl to $65/bbl, given oil production is in excess of demand, and Opec+ has some spare capacity to increase production further.
And, of course, vice versa – if the situation precipitates into a widespread and prolonged Middle East war, with shipping across the Strait of Hormuz halted, then the oil price could feasibly rise to $100/bbl and above.
In modern history the Strait of Hormuz has never been actually closed – albeit temporary slowing of traffic has occurred. About 20% of global oil supply transits through the Strait of Hormuz and 38% of seaborne crude oil trade, with an average of 125 oil tankers per day.
Until the military situation de-escalates, oil shipping companies will choose to anchor their vessels due to the risk of ship damage and/or seizures, as well as temporary unavailability of insurance cover. Satellite data shows oil tanker transit had virtually halted over the weekend – a precautionary measure by shipping companies.
There needs to be at least a month or two of a substantially different level of oil price to have a meaningful impact on quarterly indicators, both at a company and a macroeconomic level.”
For investors, it is crucial to remember that short-term changes in the oil price do not significantly affect the cashflows of energy companies and do not significantly affect macroeconomic indicators either.
There needs to be at least a month or two of a substantially different level of oil price to have a meaningful impact on quarterly indicators, both at a company and a macroeconomic level. It is the average oil price over a given period of time that matters, not the single discrete data points.
As a broad rule of thumb, a $10/bbl change in the oil price, sustained over time, causes an increase/decrease in cash flow from the operations of an integrated energy company by about 5% to 10%, and of an exploration and production company by 10% to 15%.
At a macroeconomic level, approximately, it can determine a 30-40 basis points increase in consumer inflation indexes. It can also shave off 10-30 basis points from global GDP growth, but again only if the oil price increase is prolonged in time.
Of course, for companies that have producing assets in the Gulf, the positive impact is lessened by the potentially decreased export capacity from the region. ExxonMobil has about 20% of its oil and gas production in the region, TotalEnergies 19%, Shell 13%, BP 8%, Chevron 4% and ConocoPhillips 3%.
It is worth noticing that, in the very near term, exploration and production companies will outperform, given that they benefit more than integrated oil companies from higher oil prices – but, again, the gain can revert quite quickly when the oil price heads in the opposite direction, making this a difficult market for investors to navigate.
Maurizio Carulli is a global energy analyst at Quilter Cheviot
