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

The recent invasion of Iran and the further escalation in the Middle East are causing concern in the financial markets. The immediate response is visible across the financial spectrum, although there is no panic until further notice.

Impact on commodity markets

Iran is a major oil producer and the region is crucial to global supply via the Strait of Hormuz, raising oil prices and significantly increasing volatility in energy-related commodities. Agricultural raw materials and fertilizers are also responding, partly due to higher energy costs and uncertainty about supply chains. A scenario where supply is structurally disrupted could temporarily push inflation higher worldwide. Opec+'s initial response to increase production by 206,000 barrels per day appears to be signaling rather than effectively absorbing the shock. After all, Opec+ produces around 40-45 million barrels per day.

Impact on interest rates and bond markets

The movement in the interest rate markets is ambiguous. On the one hand, higher oil prices and inflation risks can encourage central banks to remain cautious longer, limiting downward space for policy rates. On the other hand, uncertainty is causing a flight to quality, causing government bonds in core countries to be temporarily sought and long-term interest rates are falling. The balance between these two forces — inflationary pressure via energy versus demand for safe havens — will determine interest rate developments in the coming weeks.

Impact on stock markets

Global stock indices fell after the military escalation, with the biggest declines in energy-dependent, travel and cyclical sectors. Historically, geopolitical shocks have usually been a source of temporary volatility, without fundamentally changing corporate long-term profit growth 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 especially now that the private credit markets have been attracting (negative) attention for a number of weeks, it is difficult to overstate the importance of defensive balance sheet structures/debt positions. A focus that we always take to heart.

This is not the first crisis in the Middle East and probably won't be the last. A crisis is often accompanied by increased uncertainty and strong market movements, which can involve both risks and opportunities for investors.