Why the Middle East conflict has affected markets, and what it could mean for your investments

Markets are reacting with increased volatility after military intervention by the US and Israel in Iran has led to broader conflict across the Middle East. 

Here’s a brief summary of what’s happened so far:

• Following the collapse of diplomatic talks, on 28 February the US and Israel carried out military strikes across Iran to halt its nuclear ambitions and spark internal political change. Iran’s Supreme Leader, Ayatollah Ali Khamenei, and other senior leaders were killed. 
• Conflict quickly widened across the Middle East, as Iran retaliated with strikes targeting US bases across the region, including Bahrain, Kuwait, Qatar, the United Arab Emirates, and Saudi Arabia, as well as ships passing through the Strait of Hormuz. Iran also fired missiles at Israel, although these were largely intercepted.
• A drone attacked a UK-owned RAF base in Akrotiri, Cyprus, with two more intercepted. This prompted the British Prime Minister, Keir Starmer, to permit the use of British military bases for defensive purposes, and to send a Navy warship to Cyprus. 
• Regional conflict spread to Lebanon, reigniting warfare between Hezbollah (an organisation with close ties to Iran) and Israel. 

At the time of writing, President Trump has said that US action in Iran could last several weeks to achieve its objectives. However, there’s a risk the conflict could widen and last longer.

Geopolitical conflicts and events like this create uncertainty over what might happen moving forwards. 

This usually affects markets too, although reactions can vary. This often causes increased volatility as investors make changes to their portfolios during these periods as they seek to understand the longer-term implications. 

History shows that markets typically rebound as the situation stabilises, highlighting the market’s long-term resilience. Markets may react more strongly to conflicts impacting energy prices, or involving key global regions. 

As a result, you may also have seen an impact on your investments. However, periods of market volatility are often short-lived. 

The Financial Conduct Authority (FCA) encourages people to stay patient and remain invested. It highlights that if you sell when the market is down, you’ll likely suffer a loss in the value of your investments, and might miss out on any increases in value in the future if markets recover.

Rising energy prices and global market uncertainty  

The initial reaction was muted when markets re-opened following the start of the conflict over the weekend. The US-Israel strikes on Iran were broadly expected, given the build-up of military presence and the exchange of threats between the nations. 

Since then, the global stock markets have responded more strongly, as conflict in the Middle East has intensified and concerns have grown over how long it’ll last. 

The market reaction also reflects the risk around energy-supply disruption. The Middle East region is key to many global energy supplies and shipping routes, so the wider macroeconomic impact of rising energy prices could have a knock-on effect on inflation and interest rates.

In response to the US and Israel’s military intervention, Iran carried out strikes on US bases in countries in the Middle East. Many of these are OPEC (the Organization of the Petroleum Exporting Countries) members. QatarEnergy, one of the world's biggest exporters, halted gas production following military attacks on its facilities.

Alongside these strikes, Iran attacked oil cargo ships in the nearby Strait of Hormuz. This waterway is crucial to the global economy, with about 20% of global oil and gas exports usually travelling through it. 

Traffic effectively came to a halt with a warning from Iranian leaders not to follow that route, and insurers cancelled coverage for ships. President Trump has since said the US will provide insurance to tankers and ensure safe passage of oil from the Middle East to head off a potential energy crisis.

This turbulence has caused oil and gas prices to rise significantly. As many world economies rely on oil and gas, higher energy costs could in turn affect production prices for other goods, leading to higher inflation (the rate of change of prices). If inflation picks up, this may make central banks less likely to cut interest rates in the months ahead.

As a result of increasing energy prices, we’ll likely see oil and gas company stocks rise in value. Conflict can cause swings in the value of stocks across other industries, too. Defence stocks tend to perform well, with an increase in demand.

At the same time, investors may move towards traditionally safer assets like gold, bonds, or currencies perceived as ‘safe havens’. Meanwhile, other industries can suffer losses. For example, travel stocks could struggle as flights are cancelled in the Middle East.

The value of staying patient during periods of volatility

You might feel concerned about what could happen next. In reality, we won’t know for some time yet. 

As markets come to terms with these events, volatility may well continue. But it’s worth remembering that such periods are often short-lived.

Think back to the market volatility we saw in 2022 after Russia’s invasion of Ukraine.

Markets reacted after the invasion, with the S&P 500 (an index of the 500 biggest companies in the US) falling by more than 7% in the following weeks. Meanwhile, oil prices reached as much as $139 a barrel, as Western nations put embargoes on Russia, one of the biggest oil exporters in the world.

Yet, just over a month later, the index had rebounded, even increasing in value above where it had been before the invasion, as shown in the graph below:

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For context, oil was still trading at more than $100 a barrel by the end of March.

The recovery from this market fall was fairly swift. But if you’d sold your investments during the dip, you’d have missed out on the subsequent recovery. If you’d instead stayed invested, you’d have seen your investment value rise back up when the market did. 

While past performance isn’t an indicator of future results, historical events and data can help to provide context.

What this volatility might mean for your investments

It’s worth bearing in mind that markets have consistently been resilient over decades. Whether it’s recessions, political shocks, pandemics, or conflict like this, history shows us that markets can recover from such dips, regaining losses and growing in value in the long term.

Consider this table which shows the 5, 10, and 20-year performance of the S&P 500:

As you can see, the market’s long-term performance - both the average annual and total returns - has been strong. That’s despite experiencing various shocks over the period, from the dot-com bubble in the early 2000s, to the 2008 financial crash, all the way to the Russian invasion of Ukraine in 2022. After each of these events, the market continued climbing.

Even though dips in value can be unsettling, they still pale in comparison to what the market’s delivered over the long term.

Nothing is guaranteed, and past performance is not an indicator of future performance. Your investments can go down as well as up in value and you may get back less than you invest. But if you make changes now, you could lock in a loss that would have likely recovered over time.

By staying invested, you could be well-positioned to benefit when the market does recover. In fact, you may be able to make the most of lower prices, too.

Summary

Market volatility is a normal part of investing. Learning how it works and understanding how your pension is invested can help you navigate it. You can check where your money’s invested on our Plans page or log in to your online account (your ‘BeeHive’) to see your specific plan.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.