Investment implications of the conflict in the Middle East

Since the beginning of the most recent conflict in the Middle East at the end of February, there’s been much news to digest. Before I analyze the impacts of this situation on global financial markets, I want to acknowledge the significant human toll and the anxiety that a conflict of this scope has caused in the region and elsewhere.

These elements are certainly not to be ignored. That said, for the purposes of this piece, I aim to dissect the geopolitical, investment, and macro implications of these events by answering some of the questions I’ve received most frequently.

How do I characterize the conflict so far?

I view the US-Israeli campaign as militarily effective, having significantly degraded Iran’s cruise and ballistic missile forces, its drone capacity, air defenses, naval assets, nuclear sites, and command and control infrastructure.

Even so, the campaign remains strategically incomplete. US-Israeli military success has not yet translated into a durable political resolution, a negotiated off ramp, or regime capitulation in Iran.

For investors, this distinction matters because markets ultimately price unresolved political risk, not battlefield scorecards. In my assessment, the conflict has shifted from a strike driven initiative into a political-endurance and escalation management problem, which is inherently longer lasting and harder to resolve.

Is this war likely to end soon?

While we should be preparing for a variety of potential outcomes in such a fluid geopolitical environment, my base case is that the conflict will last for weeks or longer ― not days.

In my view, markets continue to misprice duration, focusing too heavily on escalation intensity rather than how long disruption may persist. At the time of writing, this conflict has the superior US and Israeli militaries’ abilities to degrade Iranian missiles, drones, proxies, and Iran’s nuclear program, versus the regime’s ability to use asymmetric means to lengthen the conflict and impose economic and domestic political costs.

What matters more for markets: Escalation or persistence?

Persistence matters more than escalation. Markets react sharply to single day escalations or leadership strikes, but sustained uncertainty is what keeps risk premia elevated over time.

For example, oil prices have remained elevated not because of one refinery strike, but because repeated maritime incidents, drone harassment, and insurance withdrawals signal that Iranian disruption in the Strait of Hormuz could last much longer. Similarly, equities have tended to sell off around retaliation thresholds rather than diplomacy headlines.

This is why I emphasize watching whether retaliation intensity is declining structurally or merely fluctuating tactically. That distinction matters for assessing the conflict’s likely duration.

Why is the Strait of Hormuz so important?

The Strait of Hormuz is the strategic center of gravity of this conflict because it is both narrow and economically critical, transiting roughly one fifth of global oil flows. There is no substitute for these flows.

Iran doesn’t need to declare or enforce a full closure to achieve its objectives. Simply keeping the strait unsafe enough — through drones, mines, missile threats, etc. — deters insurers and operators. This constrains traffic volumes and raises economic and political costs. This turns maritime disruption into an insurance and confidence problem, not just a naval or military one.

How does energy disruption affect the macro outlook?

Energy is and will continue to be the primary global macroeconomic factor in this conflict. The key risk I see is not immediate global recession, but energy driven inflation persistence, which complicates central bank reaction functions.

Even partial Hormuz disruption sustains elevated oil and gas prices via higher shipping costs, war risk insurance, and precautionary stockpiling. Second- and third-order economic impacts of a prolonged crisis (such as higher input costs and shipment delays in fertilizers and other critical components) are another complicating factor. All of this interacts directly with inflation expectations and policy credibility, especially in economies already sensitive to energy prices (Japan, South Korea, much of Europe, etc.).

In other words, trouble in the energy sector is as much a policy problem as it is a growth problem.

Is liquefied natural gas (LNG) risk more important than oil risk?

In many respects, yes. LNG markets are more concentrated, less flexible, and harder to reroute than crude oil markets. Europe and parts of Asia remain particularly exposed due to post Russia supply dependencies.

In my view, LNG disruption carries larger second order inflation risks than oil alone, especially if shipping or production constraints persist. That’s why I watch gas prices and LNG cargo flows at least as closely as crude benchmarks.

What does this conflict mean for equities and credit markets?

This environment favors dispersion over broad beta moves. Regions, sectors, and balance sheets are exposed very unevenly to energy costs, shipping disruption, and geopolitical risk.

Equities are likely to experience episodic risk off moves tied to escalation thresholds, while credit stress concentrates in specific pockets rather than systemically. This dynamic supports active selection (particularly long/short and other alternative approaches, in my view) and relative value strategies, rather than passive global exposure.

Which sectors are most directly affected?

I believe several sectors face structural, not cyclical, effects here:

• Energy and energy security assets should benefit from sustained risk premia.
• Defense, aerospace, intelligence/surveillance/reconnaissance, and missile defense are likely to see continued demand as operations extend and stockpiles are replenished.
• Shipping, logistics, and insurance face prolonged uncertainty tied to maritime risk.

These exposures will be driven by conflict duration, not daily headlines.

Where are the biggest risks in emerging markets (EMs)?

Risk is concentrated in energy import dependent EMs (China, India, Japan, etc.) and economies exposed to disrupted shipping lanes. Higher energy prices strain trade balances, fiscal positions, and currencies, while financing conditions tighten unevenly.

Exporters may benefit from short-term price effects, but volatility and policy responses will diverge sharply. This reinforces my view that EM investors consider selective exposure rather than broad based. This is a “winners and losers” backdrop that is, again, more conducive to active management allocation strategies.

How should investors think about geopolitics more broadly after this conflict?

This episode reinforces my long standing view that geopolitics is no longer episodic background noise but, rather, a persistent economic driver. In other words, geopolitics is now interacting more directly with inflation, growth, monetary and fiscal policies, and other “core” macro variables that drive the global investment outlook.

Even if active hostilities fade in Iran, the baseline geopolitical risk premium remains higher due to fragmentation, increased militarization, and unresolved security dilemmas globally. This “brave new world” of geopolitics structurally favors diversification, flexibility, and active risk management over static allocations.

What indicators should investors watch most closely as the Iran war progresses?

I focus on a handful of observable signposts, not rhetoric, including:

• Persistence and breadth of Iranian retaliation — specifically, how long can it last?
• Maritime insurance availability
• Actual shipping volumes through Hormuz
• LNG cargo flows and spot pricing
• US domestic political pressure tied to energy prices, particularly around US gasoline prices and other “election-sensitive” economic indicators as we move closer to the US midterm elections

These indicators will provide earlier and more reliable signals than official statements and political rhetoric.

What’s the bottom line here for portfolios?

In my geopolitical assessment, the Iran war has been militarily effective but remains strategically incomplete. For investors, the dominant implication is persistence. Expect sustained energy volatility, higher inflation uncertainty, and a structurally higher geopolitical risk premium — an environment likely to reward ongoing portfolio scenario planning, flexibility, diversification, and active management.