Impact of rising tensions in the Middle East

The ongoing conflict between Israel, Hamas, Hezbollah, Iran and, more recently, Lebanon has escalated with significant military actions and retaliatory strikes. As the conflict spreads the impact is being felt more widely and is starting to affect financial markets.   

Conflicts and increased geopolitical risks can have profound implications for global financial markets and investment portfolios. Understanding how to navigate these turbulent times and what impact current events may have on financial markets can help protect your portfolio.  

The increase in military activity in the Middle East initially didn’t impact financial markets. This is partly because the region is a small proportion of the global economy and the conflicts, to begin with, were not likely to impact global trade or commodities such as oil. 

The more recent escalation of tensions, spreading of the conflict and with Iran now more directly involved has raised investor’s concerns it could develop into a fully blown war and cause significant disruption in the region and have ramifications further afield. As a result, some assets are already being impacted. 

Gold is traditionally considered a safe haven asset, particularly during times of geopolitical conflict and economic uncertainty. The current tensions between Israel and Lebanon may lead to an increase in demand for gold as investors seek to protect their portfolios from any market volatility.  

Gold is still benefiting from strong central bank demand, which started to increase around 2012 and has notably ramped up in the last couple of years.  According to the World Gold Council’s Gold Demands Trends¹ report, the total global demand for gold is still on the increase with healthy over the counter transactions and central banks continuing to increase their holdings.  

With demand not expected to dissipate soon gold could offer some safety, but as with any investment it still carries risk. It has historically provided protection against inflation, but as it doesn’t produce any income your portfolio may not rise as much as it could had it been invested into other assets, like shares or bonds.  

Other investments that are often deemed a ‘safe haven’ during times of crisis include US Treasuries. Backed by the US government treasuries are considered lower risk, particularly shorter dated issues.  However, we think in the current climate it may be worth considering the types of bonds that could offer a buffer against the potential higher inflation that could come about as a result of higher energy prices, such as Treasury Inflation-Protected Securities (TIPS).  

Unlike conventional bonds, the principal value of inflation-protected bonds adjusts with inflation expectations, providing some protection against rising prices. Given the strong link between the oil price and inflation, especially during Middle East conflicts, these bonds could offer an attractive investment opportunity compared to traditional government bonds.  

At the time of writing, the global oil supply has remained unaffected. However, conflicts in the Middle East, a region critical to global oil supply, can lead to disruptions that drive up oil prices. We have already seen the oil price, and with it the share prices of the oil majors, rise at the start of October following Iran’s attack on Israel² on 1 October 2024 as fears rose the conflict would spread. 

Higher oil prices could impact global economic growth and increase inflation. Energy companies would be the beneficiaries of this and could make the sector an attractive option for investors. However, there are other factors that impact the oil price, such as the health of the global economy, so investors should be aware in times of uncertainty there can be periods of volatility and risk.

Demand for defence and aerospace products typically ramps up when conflicts escalate to address security concerns. At these times the sector’s profits could be boosted by lucrative government contracts. 

Geopolitical tensions have been rising for some time and after years of under investment in defence we expect governments to continue to boost their spending in this sector. However, the sector currently looks expensive, and the performance of aerospace stocks could be influenced by the outcome of the US election and the respective candidates’ policies. For instance, while the Trump administration might prioritise an increase defence spending (as it has in the past) if Kamala Harris gets the keys to the White House she may focus on other priorities.

There are several sectors and assets that investors can turn to in unstable times and while some may be labelled as ‘safe havens’ it’s important to remember that all investing carries an element of risk.  

Diversifying your portfolio is still one of the best ways to protect it against volatility and risk as well as preparing your portfolio for geopolitical events. It’s a strategy that involves investing across various assets classes, industries and geographic regions to spread the risk and reduce the impact one specific event may have your portfolio.  

At Evelyn Partners, we understand the importance of combined wealth management and how this can benefit your investment portfolio and long-term investment goals.  

Geopolitical tensions and volatility can add increasing pressure on investors to make decisions. If you have any questions about your own financial plan or investment strategy, speak to your usual Evelyn Partners contact, book an initial consultation online or by calling 020 7189 2400.