Geopolitical tensions and market reactions: what does the escalation in the Middle East mean for investors?

The recent raid in Iran and the further escalation in the Middle East are causing concern on the financial markets. The immediate reaction is visible across the entire financial spectrum, although there is no sign of panic as yet.

Impact on commodity markets

Iran is a major oil producer and the region is crucial for global supply via the Strait of Hormuz, causing oil prices to rise and volatility in energy-related commodities to increase significantly. Agricultural commodities and fertilizers are also reacting, partly due to higher energy costs and uncertainty about supply chains. A scenario in which supply is structurally disrupted could temporarily push up inflation worldwide. OPEC+'s initial response to increase production by 206,000 barrels per day seems to be more of a signal than an effective way to fully absorb the shock. After all, OPEC+ produces around 40-45 million barrels per day.

Impact on interest rates and bond markets

Movements on the interest rate markets are ambivalent. On the one hand, higher oil prices and inflation risks may prompt central banks to remain cautious for longer, limiting the scope for policy rates to fall. On the other hand, uncertainty is causing a flight to quality, temporarily boosting demand for government bonds in core countries and pushing down long-term interest rates. The balance between these two forces – inflationary pressure from energy versus demand for safe havens – will determine interest rate developments in the coming weeks.

Impact on stock markets

Global stock indices have fallen back following the military escalation, with the biggest declines in energy-dependent sectors, travel, and cyclical sectors. Historically, geopolitical shocks have tended to be a source of temporary volatility, without fundamentally changing the long-term earnings growth of companies, unless the conflict becomes protracted and economically disruptive.

Positioning

It is clear that geopolitical risk will remain high on the agenda in 2026. As fundamental investors, we remain focused on quality and valuation in the medium to long term.  We continuously evaluate the extent to which any price declines create opportunities. In periods of turbulence, and certainly now that private credit markets have been attracting (negative) attention for several weeks, the importance of defensive balance sheet structures/debt positions cannot be overstated. This is a focus that we always take to heart.

This is not the first crisis in the Middle East, and it will certainly not be the last. A crisis is often accompanied by increased uncertainty and strong market movements, which can present both risks and opportunities for investors.