A look back on geopolitical risk and market outcomes

The latest strikes on Iran have elevated risks for global markets.

While this is a developing situation, it is worth looking at how different asset classes have reacted in previous periods of heightened geopolitical risk, to help understand how things may play out on this occasion.

In the leadup to the strikes on Iran, the oil price had already started to price in some of the risk, having lifted around 20%. Since the strikes, and the retaliatory actions by Iran, the oil price has lifted further, to sit at over US$80 per barrel. For context, this is a similar level to where the oil price peaked in the middle of 2025 when the US previously struck select sites in Iran. The current conflict is certainly a bigger military exercise than what we saw in June last year.

The key uncertainty from here is whether the US and Israeli strikes continue to escalate into wider regional conflict or whether the conflict can ultimately be contained. The magnitude, and duration, of any geopolitical uncertainty is the critical factor for markets. A sustained period of conflict in the region would raise inflation risks, increase pressure on oil-dependent regions, and challenge neighbouring economies which are facing missile strikes, airspace closures and shipping disruptions. At this stage, we do not see the oil price reflecting a ‘worst case’ outcome with Brent crude remaining around the US$80 mark. This is well short of the ~US$120 per barrel it reached during the Russia/Ukraine conflict in 2022.

We expect there are a few reasons why oil hasn’t spiked quite as high as may be expected given how the conflict has unfolded to date. These include the fact that 1) developed economies are less dependent on oil from the Middle East, with the US now being the largest oil producer in the world, 2) the oil industry is now accustomed to dealing with short-term uncertainty (Covid, Russia/Ukraine etc), 3) global stockpiles of oil provide an element of buffer before supply disruptions become a material issue.

While we aren’t taking the risks of significant escalation lightly, if we look at history, geopolitical oil shocks tend to fade quickly. For equity markets the volatility and shocks tend to fade even quicker than commodity markets. This does make sense when we consider that share prices ultimately gravitate towards fundamentals. So once the market is able to assess the impacts (or lack of) on corporate earnings and economic growth, investors tend to look through near-term newsflow and volatility.

The table below makes for interesting reading when we look at the performance of the S&P 500 around past military conflicts. It shows that, in general, the US market does not see a material impact, certainly not a long lasting one, from any military conflicts.

S&P 500 performance after military conflicts

A range of historical examples

The following charts show the performance of certain asset classes for three months before, and three months after a key market shock. The charts are all rebased to 100 for the day of the event to help paint a clean picture of performance before and after an event.

Each event over time has had its own unique set of circumstances, but the prevailing theme is that equity markets recovered reasonably quickly (within a month or so) following initial pullbacks. However, how markets trended into each of these events (i.e. the three months heading into the event date) has varied.

June 2025 strikes on Iran  

Last year’s June strikes resulted in a relatively small shock in the context of historical relevance.  These smaller shocks tend to unwind very quickly. In the few weeks leading up to the June 13 strike, rates fell, equities were broadly flat and the US dollar was slightly stronger. As you can see in the chart above, the one standout was oil, which was up almost 20%. Gold was up modestly in the leadup, while other base metals were lower. In the weeks after June 13, equities were significantly higher, and the commodity moves had largely unwound, including a major retreat in the oil price.

Hamas attack on Israel – October 2023

Russia invasion of Ukraine – February 2022

The most significant event we can draw on in recent history is the Russia/Ukraine shock. We think this provides a reasonable case study of what magnitude of moves we could see.

Currently, the Iran conflict does not appear as material a shock as the Russia/Ukraine conflict. But if there is a significant escalation from Iran then this could prove a sensible scenario to evaluate.

In the aftermath of Russia’s attack on Ukraine, oil prices spiked more than 30%, and it only took 7 days to get there. The S&P 500 troughed the same day oil prices peaked and rallied strongly thereafter, before falling again due to the Fed rate hiking cycle. The same was observed for other equity markets.  

Current Iran strikes

Heading into the weekend’s latest strikes on Iran, the MSCI World index (as well as the US and NZ markets) had posted relatively benign performance.

Gold, oil, and emerging markets all come into this latest conflict with reasonable performance, ~15% to 20% lifts in the lead-up. Oil has subsequently lifted a further 10% or so.

The performance of a balanced portfolio

Finally, it’s useful to remind ourselves of the benefits of diversification.

The table below is somewhat theoretical but importantly highlights the benefits of having an appropriately diversified portfolio.

It shows a 60/40 portfolio of Equities and Bonds. For simplicity, we have used the MSCI All Country World Index (gross) for the 60% equities portion, and the NZ Investment Grade Corporate Bond Index for the 40% Bonds portion. Note that prior to May 2001 when the corporate bond index didn’t exist, we have used the NZ Government Bond Index. The total returns are shown in NZ dollars to better replicate what a NZ investor would experience.

Ultimately, short term volatility/downside tends to fade.

Note the table includes events beyond just military conflicts.

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