Category: Market Update

“Goodness is the only investment that never fails.” – Henry David Thoreau (1817-1862). American essayist, naturalist, Harvard graduate and protege/friend of Ralph Waldo Emerson.

Middle East Conflict – Our Latest Thoughts

“The essence of investment management is the management of risks, not the management of returns.” – Benjamin Graham (1894-1976). British-born American economist, investor, and professor and widely regarded as the father of value investing.

Where to start… February, which was a good month for investors, feels like such a long time ago. By contrast, markets entered March facing a significant geopolitical shock. The human cost of conflict always far outweighs its financial implications, but the Middle East has historically been capable of unsettling the global economy, and for that reason, investors are now reeling from the invasion of Iran.

Given the unpredictability of markets these days, and with the US President flip-flopping between declaring victory, threatening escalation, and “doing a deal”, everything may have changed by the time you read this commentary. Nonetheless, seeing how investors behave in these situations can be instructive.

With the conflict now entering its second month, the risks to the global economy are mounting. Financial markets, however, are not yet flashing red. While the headlines have been dramatic over the last few weeks, market moves so far suggest investors are reacting with caution rather than in panic mode.

Government bonds have been at the sharp end of a global sell-off. The prospect of higher inflation and, potentially, subsidies for energy users, has sent a chill through bond markets. UK bonds have suffered the biggest losses, largely because Britain’s dependence on imported gas amplifies the inflation risk, and due to the already high debt levels and borrowing costs.

Most major equity markets have moved lower, though moves have been measured rather than disorderly, with falls less than those seen within days of Mr Donald Trump’s initial tariff announcement in April 2025.  Emerging and Asian markets remain among the weakest performers due to their reliance on imported energy, but this follows strong performance at the start of the year. Developed markets have fallen, but to a lesser extent.

Sterling has weakened modestly against the US dollar, reflecting both the relative strength of the dollar in periods of geopolitical uncertainty and the UK’s exposure to higher energy prices. Gold and silver, which have almost doubled in the last two years on geopolitical uncertainty, have not behaved entirely as traditional “safe havens”, and have suffered notable declines. Futures markets suggest that oil will fall back to around $90 per barrel by the end of the year.

Taken together, these moves suggest that investors are assuming a contained conflict, rather than a prolonged or global escalation. In other words, investors are acknowledging the risks but are not yet pricing in a worst-case scenario….and with some justification.

Real energy prices are lower than in 2022, following the invasion of Ukraine, or indeed during the oil shocks of 1973, 1980, and 1990. Growth in US energy output and renewables has reduced the world’s reliance on Middle Eastern oil. Energy is used far more efficiently than in the past. And, unlike the 1970s, consumer nations have petroleum reserves that can be used to protect against shortages and dampen sharp increases in prices.

None of this detracts from the risks posed by a prolonged war. Middle Eastern energy may play a lesser role in the world economy, but it is still vital. The breadth of the conflict, with energy facilities across the Gulf at risk and the Strait of Hormuz virtually closed, is unprecedented.

Despite four weeks of aerial bombardment, Iran is still able to cause enormous disruption to global energy markets. Iran is launching far fewer missiles than at the start of the war, but it is still capable of targeting energy infrastructure across the Gulf. Drones have transformed the nature of warfare, giving Iran a weapon that is hard for adversaries to suppress, and that can be produced cheaply and in volume.

Past energy shocks have contributed to major economic downturns, but they have rarely been the sole cause. The invasion of Ukraine and the ensuing energy shock coincided with and reinforced the inflationary effects of the post-COVID surge in economic activity. The first Gulf War in 1990 sent energy prices skyrocketing, adding to already significant domestic inflationary pressures, pushing the US and the EU into recession.

The energy shock has wrecked market hopes for interest rate cuts this year. Financial markets are now pricing in roughly 75bp of rate rises in the UK and the euro area by December.

Economists are, however, less convinced of the need for, and the likelihood of, big interest rate rises this year. Against a backdrop of sluggish growth and rising unemployment, many economists think higher energy prices will have only a transient effect on prices, with inflation falling back sharply in 2027.

The OECD also thinks the jolt to inflation will be short-lived. It does not expect higher energy prices to feed back into wages and other prices in the way that was seen after the 2022 energy shock. Indeed, the OECD thinks energy prices will have vanishingly little impact on underlying or core inflation. This leads the OECD to the view that the global headline inflation rate will drop from 4% this year to 2.7% in 2027, only marginally above the 2.5% rate forecast in December.

If the OECD is right and inflation fades next year, the world should be able to get by with only a short-term knock to growth.

What happens next?

Unlike many ultracrepidarian financial journalists, I have no special endoscope to see inside the Iranian regime nor the brain of President Trump, but while forecasting outcomes in a rapidly evolving geopolitical environment is inherently challenging, it is helpful to consider incentives.

For the US-Israeli coalition, there is a clear objective to eliminate threats, but also strong political sensitivity to sustained higher energy prices. The US president wants to end the war soon, to salvage any form of political survival.

On the Iranian side, objectives are difficult to analyse, with the potential to prolong disruption and apply pressure through energy markets. Ultimately, conflict outcomes are uncertain and driven by a complex mix of factors, but if Iran’s IRGC want to still have a regime to control in the future (survival), then diplomacy will prevail.

There has always been a risk that President Donald Trump would declare victory prematurely. That’s what he does; it seems to have worked for him in the fracas over Greenland, and he usually gets away with it.

In recent confused presidential musings, threatened attacks on Iranian energy sites were put on hold because of “very good and productive conversations regarding a complete and total resolution of our hostilities in the Middle East.”

After such wildly inconsistent pronouncements, it’s tempting to ignore the president, and investors are rightly sceptical that Trump can declare victory and walk away against a motivated opponent that maintains control over the Strait of Hormuz as leverage. But oil prices and central bank projections can be self-reinforcing. They can also collude with markets to decide that a continuing conflict doesn’t matter.

The Iran-Iraq war carried on from 1980 to 1988 with a million casualties and endangering exactly the strait of water that is at issue now without impeding a historic bull market in equities. In Ukraine, the war continues to put the lives of young Ukrainians and Russians into a meat grinder to little obvious purpose. But since markets reassured themselves that it wouldn’t lead to nuclear conflict, and that the world could find a way to survive without Russian oil and natural gas, they behaved as though the war was over.

This points to a new risk. Markets – not the US or Iran – might declare that the war is over. That would hurt anyone still prudently guarding against the risk of further escalation, but it’s a real possibility.

We know from history that energy shocks have, time and again, been harbingers of slowdowns or worse. More fundamentally, forecasting amid the sort of wild swings in news flow we are seeing every day can only, at best, give a point-in-time view. No one can have a high degree of conviction about the future without a view on how the conflict ends. And that is no less clear today than it was four weeks ago.

Investors can rely on TACO (Trump always chickens out), but markets are now looking for a WACO (Will the Ayatollahs Chicken out?). “It takes two to taco” – We have Trump; we now need the Ayatollahs.

Investment implications: stay disciplined

While the current backdrop may feel unsettled, periods of uncertainty are a natural and recurring feature of market cycles. Markets tend to adjust rapidly as new information becomes available, often repricing risks in a relatively short space of time. Although this can lead to heightened volatility in the near term, it also plays an important role in resetting valuations and creating opportunities for disciplined, long-term investors.

It is important to remember what we can control in times of uncertainty and we remain focused on taking a disciplined and measured approach. Periods of geopolitical tension often bring short-term volatility, but they rarely alter the long-term drivers of markets: economic growth, corporate earnings, innovation, and capital investment. Over the long term, the underlying momentum of the global economy and the companies within it have consistently prevailed.

The Clarion portfolios are built with diversification at their core. Exposure across regions, sectors and asset classes helps reduce reliance on any single event or outcome. Diversification of investment styles is also important, with a sensible balance between active and passive funds.

Attempting to adjust portfolios in response to rapidly evolving geopolitical situations is extremely difficult and can often lead investors to miss the subsequent recovery.

In times like these, have a plan and follow it. Experience and patience can shine in unstable times. Remain diversified, stay invested, and avoid letting short-term noise derail a carefully constructed investment journey.

We continue to monitor developments closely and will adapt where necessary, while avoiding reactive decision-making driven by short-term noise.

As always, we thank you for your continued support, and we look forward to updating you regularly throughout 2026.

Please click to access The Clarion Investment Diary for March with full details of the Clarion Portfolio Funds, including performance statistics.

Keith W Thompson

Clarion Group Chairman

March 2026

Creating better lives now and in the future for our clients, their families and those who are important to them.

Risk warnings

Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.

The content of this article does not constitute financial advice and you may wish to seek professional advice based on your individual circumstances before making any financial decisions.

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