Rising geopolitical tensions in the Middle East have once again pushed global markets into a period of uncertainty. Since military operations involving the United States, Israel, and Iran intensified, investors have seen noticeable swings in asset prices, particularly in energy markets and equities.
While markets often react quickly to geopolitical shocks, the long-term impact will largely depend on how the conflict evolves. If tensions ease in the near term, global equities may recover quickly. However, prolonged disruption to energy supplies could pose more serious risks to global economic growth and financial markets.
Below is a closer look at the potential implications.
Market Volatility Has Increased
The past week has been marked by heightened volatility across global markets. Energy prices have surged as investors price in potential supply disruptions, while risk assets, particularly equities, have experienced uneven sell-offs.
At this stage, uncertainty remains extremely high. Analysts are monitoring several potential paths forward, with two scenarios currently appearing most plausible:
- A relatively quick shift from military activity toward negotiations
- A gradual cooling of tensions without a major escalation
Both outcomes could limit the long-term impact on financial markets.
However, risks rise significantly if energy supplies are disrupted for an extended period. In such a scenario, the global economy could face slower growth, higher inflation, and tighter financial conditions. International markets—particularly in Europe and Asia—would likely feel the strongest effects.
Investors Should Avoid Reactive Decisions
Periods of geopolitical tension can be uncomfortable for investors. Headlines often emphasise worst-case scenarios, which can trigger emotional investment decisions.
History shows that reacting impulsively to geopolitical events can harm long-term portfolio performance. Well-diversified portfolios are designed to withstand temporary shocks, and equity markets have often rebounded quickly once conflicts move toward resolution or ceasefires.
While the current situation presents real downside risks, it may also be too early to assume the worst—or to make aggressive portfolio shifts.
Energy Prices Are the Key Variable
One of the most significant developments since the conflict began has been the sharp rise in global energy prices. The Middle East plays a critical role in global oil and gas supply, and disruptions in the region can ripple through the entire global economy.
Two key chokepoints are currently affecting supply:
1. The Strait of Hormuz
A critical maritime route for global energy shipments.
2. Liquefied Natural Gas (LNG) production in Qatar
An important supplier to global energy markets.
Together, disruptions in these areas have temporarily affected roughly 20% of global oil supply and 20% of global LNG supply.
Strategic petroleum reserves and floating oil inventories may help cushion the immediate impact, but they cannot fully replace disrupted supply indefinitely.
In addition to energy, other trade flows could be affected. Approximately 4.5% of global trade passes through the Strait of Hormuz, including commodities such as:
- Fertilizer
- Precious metals
- Aluminum
- Cement
This highlights how geopolitical conflicts can extend beyond energy and influence broader supply chains.
International Equities Still Have Long-Term Appeal
Despite the current uncertainty, the broader outlook for international equities remains constructive.
Several structural factors continue to support international markets:
1. Attractive valuations
International stocks still trade at lower valuations compared with U.S. equities.
2. Improving earnings outlook
Economic indicators suggest a potential acceleration in corporate earnings growth.
3. Favourable sector exposure
Many international markets have strong exposure to industrial and technology sectors tied to long-term investment themes.
Recent data supports this outlook. The Global Manufacturing Purchasing Managers’ Index (PMI) recently reached a four-year high, with new orders indicating ongoing growth and investment momentum.
Sector Trends That Could Support Growth
Certain sectors within international markets could benefit from long-term structural trends.
Industrials
Increased global defence spending and major infrastructure investment—particularly related to artificial intelligence and data centre development—could support industrial companies.
Industrials represent a large share of international equity benchmarks, including:
- About 20% of the MSCI EAFE Index
- 21% of the MSCI Eurozone Index
- 27% of the MSCI Japan Index
Technology and Emerging Markets
Emerging markets may also benefit from the rapid expansion of AI infrastructure.
Technology accounts for roughly one-third of many emerging market equity indices, alongside internet and consumer technology companies.
Currency Movements Could Influence Returns
Currency trends are another important factor for international investors.
A weaker U.S. dollar typically boosts returns for both developed and emerging market stocks. While geopolitical tensions may temporarily support the dollar as a safe-haven asset, longer-term trends could still point toward dollar softness.
Several central bank policies may contribute to this shift:
- The U.S. Federal Reserve is expected to cut interest rates.
- The European Central Bank and Bank of England are likely to hold steady.
- The Bank of Japan may continue raising rates.
If these policy paths continue, narrowing interest-rate differences could weigh on the dollar and support international equities.
Valuations Still Favour Global Markets
Even after recent gains, international equity valuations remain attractive compared with U.S. markets.
Emerging market stocks, in particular, appear relatively inexpensive. Earnings estimates for many emerging market companies have been rising faster than stock prices, helping maintain favourable valuations.
This valuation gap continues to be one of the strongest arguments for long-term international diversification.
The Bottom Line
International equities remain strategically attractive, particularly if the current conflict moves toward a ceasefire or gradual de-escalation.
Markets have historically rebounded quickly following geopolitical shocks. However, investors should remain cautious in the near term. Military conflicts can produce unexpected developments, and prolonged energy disruptions could increase recession risks.
For now, maintaining diversified portfolios and monitoring energy markets may be the most prudent approach while the situation unfolds.