Market volatility in the wake of conflict in the Middle East

The US and Israel have launched airstrikes on Iran, while retaliatory attacks by Iran have hit several countries around the Middle East. As a result of these events, there was a volatile opening for many investment markets in the immediate aftermath, with many equity markets dropping back in the first hours of trading. At the same time, oil and gas prices have soared on fears that supplies may be impacted by shipping disruption in the Persian Gulf.

Initial market reactions

While regional market falls where not initially significant, sector-level shifts were more substantial. For example, airline and other travel stocks, along with retail and banking shares, fell back. The potential for disruption to shipping supplies and concern about disruption to travel, given the significance of the United Arab Emirates as a travel hub, were the main reasons for these moves.

At the same time, there were robust early increases in the prices of energy and defence stocks. In assets, bond yield curves have so far remained relatively flat. There has also been a small rise in the US dollar, which is often seen as a ‘haven’ in difficult times.

What we are looking out for

While there is initial disruption to supplies from the states on the Persian Gulf, including for oil and liquified natural gas (LNG), it is not yet clear whether this will be short-lived. If the conflict persists, it could push both inflation and nominal bond yields higher.

As certain markets and sectors are relatively fully valued, prolonged conflict could also see some of these being hit harder – for example segments of the technology and other growth-related sectors. We would note that some of these areas have already seen relative underperformance in recent months.

Long-term implications

While we’ve already seen market fluctuations on the back of unfolding news in the Middle East, we believe it is important for investors to focus on the long term and long-term investing strategies. Selling as a knee-jerk reaction to issues has often been a mistake leading to losses and missing out on potential growth opportunities.

Looking at past market disruptions and events that caused volatility, it becomes evident that strategic planning for the long term and patience has generally allowed investors to potentially benefit from the potential for markets tendency to recover and grow over time.

Investment principles

Adhering to the principles of long-term investing can help investors to navigate the market difficulties posed by the outbreak of conflict in the Middle East:

• Diversification: Spread investments across various sectors and geographies to mitigate risks. Specifically:
  • We believe bonds still hold benefits for diversification, even if inflation steps higher in the coming weeks and months.
  • We continue to focus on equity diversification by regional and sector. As we have already seen there has been a divergence in sectoral performance in the first hours of trading, as the market expects there to be short-term disruption to trading for certain sectors.
• Research: Stay informed about market trends and the underlying economic factors affecting investments.
• Patience: Recognise that market fluctuations are part of the investment landscape and maintain a long-term view.

Conclusions

We may see further investment market volatility in the short term, but we don’t believe there is any need to panic. In our view, investors should focus on patient and informed decision-making that utilises diversification and an understanding that markets should eventually stabilise and continue to offer opportunities for growth. Overall, diversification often mitigates the impact of volatility in equity markets, given the potential for bonds to hold up better in times of instability.

Over the long term, we expect markets to recover, but we continue to monitor the conflict for any further escalation.