The US and Israel’s attacks on Iran have caused considerable uncertainty for the world and led to unusually large movements across financial markets in a short space of time. While the human cost of any conflict is paramount, as an investor, it’s important not to panic in this situation. In general, shares went down, and oil went up.
The 17% rise in the price of oil in the past five days could have a significant negative impact on costs for consumers and businesses, and the alarming scenes in the Middle East more generally create widespread nervousness and have weakened investor sentiment.
The situation is still unfolding and it’s impossible to say whether any energy price shock will be short-lived or have a longer-lasting effect. At the time of writing, stock markets had started to stabilise, yet the oil price continued to creep higher.
Do I need to change my investments?
Investing is a marathon and not a sprint, and periods of heightened market uncertainty are the cost of reaping long-term investment returns.
Sticking to an investment plan that aligns with your risk appetite gives you the best chance of achieving long term investment goals. Anyone using a regular investing service might want to leave it untouched.
It is important not to panic during choppy markets and to resist the temptation to lock in losses because this increases the risk that you are out of markets when share prices recover. This is not guaranteed to happen, but history suggests markets do recover from times of turmoil.
How did markets react this week?
Global equity, bond and commodities markets reacted to military action in Iran with oil and gas prices spiking higher and stock markets falling amid rising volatility.
The price movement suggest investors have reduced their appetite for riskier assets like stocks and shares to reflect the increased risks of negative effects on corporate earnings and global growth from higher energy costs and inflation.
Whether these risks materialise depend on how long the conflict lasts and the extent and magnitude of disruption to the global economy.
Why did the US dollar go up?
During times of rising uncertainty investors tend to flock to the US dollar for its perceived safe haven status, backed by the world’s largest economy.
Since 27 February this year, the value of the dollar against a basket of major currencies has increased by around 2%. It is also causing some stress in emerging currencies.
Counterintuitively, gold and silver prices have fallen in value, partly because they are priced in dollars, and partly because they had previously had a strong run-up in price prior to the conflict. A strong US dollar also makes it more expensive for buyers using other currencies to buy gold.
What is more surprising is the reaction of US 10-year Treasury bonds, which might normally be expected to increase in price as investors buy them for safety. Yields have gone up from 3.96% to 4.17%, meaning prices have gone down.
There may be a fear that persistently high oil prices make it more difficult for the US Federal Reserve to cut interest rates as previously expected.
Adding to that angst, the latest reading of the US ISM Manufacturing index on 2 March, regarded as a good leading economic indicator, showed a surprise rise in prices paid by manufacturers, which hit their highest level since 2022.
Which parts of the market have held up best?
While all stock markets have come under pressure, the US benchmark S&P 500 index has outperformed other equity markets appreciably, reversing the “sell America” narrative that dominated before the conflict.
Among precious metals, silver has been the worst performer, falling nearly 12%, possibly reflecting its lower liquidity compared to gold. Over the past year both gold and silver are still up strongly, notching up gains of 75% and 154%, respectively.
In terms of FTSE 350 sectors, the oil and gas sector is the best performer while the aerospace and defence sector, while modestly lower, has held up better than most.
More surprisingly, the software and computer services sector is the second-best performer. This reflects a relief bounce from the deep sell-off in software stocks seen in early February related to AI fears.
On the downside, alongside precious metals the household goods and construction sector has been heavily sold. This relates in part to the 25% fall in UK housebuilder Vistry’s shares following a profit warning on 4 March.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...
