Markets hate uncertainty, and nothing creates uncertainty quite like the US bombing Iran’s nuclear sites, while missiles continue to fly between the Islamic republic and Israel.

We’ve had a number of clients asking whether this escalation is a cause for concern from an investment perspective. The truth is that geopolitical events in the Middle East tend to have a limited impact on stock markets – unless one thing happens, the price of oil spikes.

Historically, major conflicts in the region have resulted in significant oil price rises. The 1973 Yom Kippur War (which led to the Saudi oil embargo), the 1990 Gulf War and the 2003 Iraq War all triggered notable jumps in the oil price.

As the chart below shows, oil price spikes can push up inflation, because they act like a tax on the global economy. Energy costs go up, transport and production costs rise, and consumers have less to spend elsewhere. And, as inflation picks up, central banks often hesitate to cut interest rates – a potent combination that can act as a drag on growth. Sharp rises in oil prices – particularly moves of 50% or more – have often preceded recessions.

So, the signal investors should be watching is the oil price. Specifically, if the oil price rises above $100 a barrel for a sustained period. If oil pushes that high and stays there, then yes, it could spell trouble for the global economy.  

It’s worth noting though that not all parts of the market react in the same way. The UK stock market, for example, has relatively high exposure to energy companies, which can actually benefit from rising oil prices. This can provide balance in a broader portfolio when other assets come under pressure.  

History also shows that markets tend to tread water during rising tensions but often rebound quickly at the first sign of de-escalation. And, more often than not, the oil price gives us that signal before the headlines do – falling back below recent highs as tensions ease.  

Key takeaway

Diversification through multi-asset investing can help to manage risk and smooth returns during periods of geopolitical uncertainty.

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.