Middle East Conflict - what it means for your investments

We understand that recent news headlines can beunsettling. The escalation of conflict in the Middle East — involving the United States, Israel, and Iran — has understandably raised questions about what this means for financial markets and, more importantly, your investments. This update is designed to cut through the noise and give you a clear, balanced picture of what is happening and what we believe you should do.

The  key message: History shows that  geopolitical events create short-term volatility, not permanent damage to  well-managed, diversified portfolios. Our advice remains clear — stay invested, stay focused on the long term, and resist the urge to react to headlines.

WHAT IS HAPPENING IN THE MIDDLE EAST?

Tensions have escalated sharply following direct military action between the United States, Israel, and Iran — one of the most significant regional conflicts in decades. The conflict centres on Iran’s nuclear program, with missile and drone strikes reported across the region, including near critical energy infrastructure and key shipping routes.

The most pressing concern for global markets is the Strait of Hormuz — a narrow but vital waterway through which approximately 20–25% of the world’s daily oil and gas supply passes. Iran has threatened, and at times disrupted, shipping through this route, raising concerns about broader energy supply shocks.

That said, leading economists note an important historical pattern: Middle East conflicts have historically remained contained rather than escalating into prolonged global wars, given the economic cost to all parties involved.

HOW HAVE MARKETS RESPONDED?

Financial markets have reacted in a classic “risk-off” manner — investors moving away from growth assets toward safer alternatives. The specific moves we have seen include:

•   Oil prices surged sharply, briefly moving above US$100 per barrel as markets priced in supply disruption risk.

•   Global share markets pulled back 2–10% from recent highs, with the Australian share market declining approximately 6–7% at its worst point.

•   Defensive assets such as gold and government bonds rose as investors sought safety — which is precisely how well-diversified portfolios are designed to behave.

Importantly, even though these moves have been sharp, they are not unusual. Similar volatility occurred during the Gulf Wars, Russia’s invasion of Ukraine, and other past Middle East conflicts — and in each case, markets ultimately recovered once uncertainty eased.

THREE POSSIBLE SCENARIOS FROM HERE

Most economists outline three broad paths forward. Understanding each helps frame how we are thinking about your portfolio:

‍Contained  Conflict (Most Likely)

Markets stabilise once it becomes clear energy supplies are not materially disrupted. Oil prices ease, and share markets recover — consistent with what we have seen following most past geopolitical events.

Extended  Regional Conflict (Possible)

Oil prices remain elevated for longer, contributing to higher inflation and softer economic growth. Markets may remain volatile, but this alone is unlikely to cause a deep or lasting bear market.

Severe  Escalation (Lower Probability)

A prolonged closure of the Strait of Hormuz could push oil prices significantly higher and weigh more heavily on global growth. Even in this scenario, history shows markets eventually adjust and recover as uncertainty fades.

WHAT WE ARE WATCHING

 We are monitoring three key variables that will shape how markets evolve over the coming weeks and months:

•   Duration and scope of the conflict. A short, contained conflict points to only temporary volatility. A prolonged war increases downside risk, particularly if energy infrastructure is damaged.

•   Oil supply disruptions. Iran produces around 4–5% of global oil, but the greater risk is shipping disruption. Notably, the Strait of Hormuz has never been fully closed for an extended period, even during past wars.

•   Inflation and interest rate implications. Higher oil prices act like a tax on consumers and can slow growth. This may end up being deflationary over time — meaning the RBA is likely to look through short-term price spikes rather than react aggressively.

WHAT THIS MEANS FOR YOUR PORTFOLIO

While the headlines are unsettling, this does not change our long-term investment strategy.

Periods like this are uncomfortable — but they are a normal and expected part of investing. Geopolitical events tend to create short-term volatility, not permanent damage to well-diversified portfolios. Attempting to time markets during periods of heightened uncertainty has historically been far more damaging than simply staying invested.

Your portfolio has already been constructed with diversification, defensive assets, and your long-term objectives in mind. Making reactive changes during times of stress risks locking in losses — and missing the eventual recovery, which history shows consistently follows periods of market turbulence.

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Our advice is straight forward: Stay in your seat. Ride out the volatility. Focus on long-term outcomes rather than short-term noise.

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Sources include AMP, Betashares, Morgan Stanley, and J.P.Morgan Private Bank. Please speak with your adviser before making any investment decisions.

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