US-Iran conflict: Key questions for investors

Military strikes by the US and Israel on Iran over the weekend have triggered a wave of retaliatory attacks, escalated tensions across the Middle East, and sent waves through global marke ts.

• Qatar—one of the world’s largest exporters of liquefied natural gas (LNG)—halted production after Iranian drone strikes targeted critical facilities at Ras Laffan and Mesaieed. About 20% of global LNG exports, primarily from Qatar, typically transit the Strait of Hormuz, which has now seen tanker traffic grind to a near halt. European natural gas prices traded in the Netherlands stood roughly 33% higher at the time of writing, while UK futures were also up 33%.
• Brent crude o il climbed around 5.5% on Tuesday morning to USD 82 a barrel at the time of writing. Concerns about the security of transit through the Strait of Hormuz, coupled with the shutdown of Saudi Arabia’s Ras Tanura refinery after a drone attack, has heightened supply concerns. Additional precautionary shutdowns were reported at oil and gas facilities in Iraqi Kurdistan and Isr ael, further tightening global supply.
• Gold approached its record close of USD 5,400/oz as investors sought shelter on Monday, before giving back some ground on Tuesday to trade 1% lower at USD 5,260 at the time of writing. The prospect of sustained energy price shocks led investors to scale back expectations for near-term Federal Reserve rate cuts, with fed fund futures markets now pricing the next rate cut by the September FOMC meeting. The US dollar strengthened, while 10-year US government bond yields stood around 5bps higher as we went to print.
• Equities are mixed. Asian stocks extended losses on Tuesday, with South Korea's Kospi down 7.9%. Major European stock indices stood between 2.5% and 4% lower at the time of writing, while S&P 500 futures indicated a 1.7% decline at the open. Energy and defense stocks have outperformed, while travel-related stocks have come under pressure.

Scenarios and investment thinking

We foresee two potential scenarios:

• Our base case is that there will be only a brief disruption to the global supply of energy. We expect the current spike in the price of oil to reverse, at least partially, once it becomes clearer that transit disruptions are likely to prove temporary, most critical oil infrastructure remains intact, and the imperative for continued military action fades. In this scenario, markets may prove volatile over the coming weeks, but would likely thereafter start to refocus on positive global economic fundamentals. This would be in line with the impact of most geopolitical shocks in recent history.
• Our risk case would see a more sustained disruption to the production or flow of energy from the region, with higher energy prices for longer beginning to have a bigger impact on the global economy and markets. Such negative outcomes followed the Yom Kippur War in 1973 and the start of the Russia-Ukraine War in 2022.

As we described in our 1 March CIO Alert, "US-Iran escalation adds to geopolitical risks," we will be monitoring the following five issues closely:

1. Will the flow of energy through the Strait of Hormuz continue?
2. How will energy production be affected?
3. How quickly will the US and Israel "declare victory" and how quickly will Iran's capacity to retaliate be degraded?
4. What would be the impact of a higher oil price on inflation and growth?
5. How would central banks react to higher energy prices?

We note that the shutdown of Qatar’s LNG production and the attack on the Saudi refinery have heightened supply risks. But, overall, we think our base case remains intact, and we recommend staying invested in broad equity indices while also diversifying within stocks and across asset classes to improve portfolio robustness.

FAQ

1. How long might the conflict last, and how far might it spread?
In our base case, we expect the conflict to last less than four weeks because of the rapid degradation of Iranian military capabilities, the relatively limited US stockpiles of defensive weapons (interceptors), as well as US domestic political considerations: The Trump administration will not want a prolonged period of higher energy prices in the run-up to the midterm elections.
The conflict has already spread to multiple countries, but we see a low risk (less than 10% probability) of an escalation that draws in Russia or China. Russia’s focus remains on Ukraine, which constrains its ability to pursue additional military goals. Meanwhile, we believe China’s focus is likely to be more on avoiding economic costs related to the conflict, rather than direct or indirect involvement. China has been reducing its imports of Iranian oil in recent months, and Beijing has historically never been active in any Middle East conflict.

2. How do we expect oil prices to move from here?
Brent crude is trading around USD 82/bbl on Tuesday at the time of writing, back near its initial price spike on Monday. In our view, this price level does not represent a stable equilibrium.
If shipping companies continue to curb transit through the Strait of Hormuz as a precautionary measure, a point will be reached where the lack of storage capacity in some countries like Iraq might result in production becoming "shut in." In addition, if further attacks on energy infrastructure in the region were to knock out a high volume of production capacity, this could trigger supply disruptions and could push oil prices above USD 90/bbl. The extent of any initial oil price spike depends on the perceived severity and duration of the disruption. However, we do believe available global oil inventories could help plug supply shortfalls and limit the extent of any shortages, helping steady oil prices over time.

Conversely, a relatively rapid end to hostilities and a resumption of normal oil flows, more aligned to our base case, would likely send Brent crude prices back down into the USD 60-70/bbl range that we anticipated prior to the escalation.

3. How might higher oil prices affect the global economy?
The global economic impact of higher oil prices depends on both the duration and the magnitude of the price increase. In our view, oil prices would need to remain elevated for at least several months before having a material effect on growth or inflation, a scenario that is outside our base case.
On balance, a sustained oil shock would also likely present a greater risk to inflation than to growth, especially since drags on growth would likely be partially offset by increased investments in the energy sector.

4. How much higher can gold prices go?
Gold gave up some of its recent gains on Tuesday morning, but the price is still up almost 20% so far this year. In the past, similar conflicts in the Middle East have raised gold’s geopolitical risk premium by 5-10%. But it is important to note that a geopolitical risk premium is not the only driver of our overall bullish stance on gold. Strong central bank purchases, concerns about high government debt, fiat currency diversification, and economic policy instability also reinforce gold’s value as a hedge in investment portfolios.

Although the situation in the Middle East remains unpredictable—and a resumption of peace talks could lead to a temporary fall in prices—we believe that macroeconomic conditions favor the possibility of gold reaching USD 6,200/oz this year. Gold prices could rise even further if sustained high oil prices result in weaker global growth prospects or stagflation.

5. Amid the volatility in the Swiss franc, where next?
Amid strong demand for assets seen as a safe haven, the Swiss franc initially appreciated on Monday to its strongest against the euro since January 2015. But it fully reversed its rally over the course of the day, after the Swiss National Bank (SNB) stated that its "willingness to intervene in the foreign exchange market has increased, in view of international developments."
We do not believe that the SNB will target a specific EURCHF level, nor do we expect the SNB to cut interest rates into negative territory. Additionally, the ongoing conflict may mean the Swiss franc stays in demand in the near term. Nonetheless, we expect EURCHF to move higher and USDCHF to trend sideways over the balance of this year, as "safe-haven" demand gradually subsides over the course of 2026.

6. What should investors make of the rally in the US dollar and the increase in government bond yields?
On Monday, the US Dollar Index (DXY) rose by nearly 1% and stood roughly 0.8% higher on the day at the time of writing. We believe this reflects a combination of the dollar’s traditional "safe-haven" role, the rise in oil prices (since the US is a net oil exporter), and the parallel upward shift in the US yield curve, on both an absolute and a relative basis.

While a combination of safe-haven flows and higher oil prices may support the US dollar in the short term, we believe that this move is likely to reverse over the medium term. In our base case, we believe disruptions to the global energy supply are likely to prove short-lived. We also do not believe the Federal Reserve will be in a rush to alter its policy stance, and the decision on "looking through" the oil price shock will likely mirror the earlier debate around US tariffs, in our view. We note that, over the years, central bank officials have expressed an eagerness not to overreact to one-off increases in price levels. At this stage, we believe the Fed remains on track for two 25-basis-point rate cuts this year, but acknowledge that the timing of these cuts has become more uncertain.
We expect the euro to regain ground against the dollar over the balance of the year, and our year-end forecast for EURUSD remains 1.20, versus 1.16 at the time of writing. Meanwhile, although the 10-year US yield is likely to be volatile over the next few months, we do not anticipate a material break-out from the recent trading range.

7. How might tech be affected by the crisis, and might current volatility bring an opportunity to add to allocations?
We do not anticipate a meaningful correction in technology based on geopolitical risks. At the same time, we note that the operating environment for AI-linked stocks is becoming more nuanced. We recommend a diversified and active approach across the enabling, intelligence, and application layers, and suggest investors review concentrated exposures—particularly in individual AI stocks or sectors where competition is intensifying. Investors should also review concentrated exposures to individual software firms and pay particular attention to companies most at risk of AI disintermediation.

Higher energy prices could also present a headwind for parts of the sector, given the energy intensity of AI, although a greater focus on energy efficiency could also benefit parts of the power and resources sector.

Investors with overall excess exposure to technology should consider diversifying toward areas of the US market where we see superior risk-reward, including industrials, banks, health care, utilities, and consumer discretionary.

8. Is it a good time to invest in defense stocks?
US defense stocks have rallied by more than 6% over the past two weeks as the probability of a conflict between the US, Israel, and Iran has increased. We believe the conflict could be seen as indicative of a broader shift toward more active military intervention, and will likely keep governments worldwide focused on ramping up defense spending, including on modernization. The US is considering a 50% budget increase for 2027, while European NATO members aim to raise defense spending to 5% of GDP by 2035. Asia-Pacific nations are also boosting military expenditures, with China increasing its defense budget by around 7% in 2025. Investment is flowing into advanced weapons, munitions, cybersecurity, and next-generation technologies like drones and AI-enabled systems.

While the sector is likely to be a beneficiary of a multi-decade rearmament cycle, we favor a selective approach given risks including regulatory changes, budget constraints, and the need for companies to adapt to new threats. We focus on diversified missile and munitions suppliers and innovation-driven subsectors, rather than pure-play US defense primes. Within the European industrials sector, we also have a positive view on select defense stocks, given shifting European political attitudes toward higher defense spending, even if it will take time to restore sustainable defense readiness.

Investors interested in building more strategic exposure can consider using heightened single-stock volatility to generate income via structured strategies.

9. How should investors respond to apparently overlapping risks?
Recent weeks have seen market volatility driven by an unusually wide range of factors, ranging from geopolitical risk, to concerns about AI competition, and worries about credit markets. It remains important that investors do not let fear and uncertainty drive hasty investment decisions.

We believe that investors’ best defense against potential risks is diversification, which can help mitigate the impact of idiosyncratic risks, while also ensuring investors can continue to participate in what we still expect to be a further rise of roughly 10% for the MSCI AC World Index by the end of 2026.

With that in mind, we believe investors with biases toward one region, sector, or company should take the opportunity to diversify, to capture returns and manage risks. In the US, we prefer industrials, banks, health care, utilities, and consumer discretionary. In Europe, we favor "leaders" across sectors, including stocks from the defense sector, which offer structural growth, and have also proven to be good portfolio diversifiers in an uncertain geopolitical environment. In APAC, we believe China (including its tech sector), India, Australia, and Japan will be among the areas driving the next leg higher.

Investors can further strengthen portfolios by adding market hedges or diversifiers. For example, investors concerned about a sustained rise in commodity prices can consider broad commodity exposure as a potential source of diversification and portfolio insulation, in our view. We also believe investors should ensure adequate exposure to quality fixed income and alternatives such as hedge funds, both of which can help reduce portfolio volatility and limit the impact of shocks. In this environment, we see a stronger role for select hedge fund strategies—to help stabilize portfolios by navigating regime shifts and exploiting volatility-driven dislocations. Investors should assess their ability and willingness to manage risks related to alternative investments, including but not limited to illiquidity.