Before dawn on a late February morning, the balance of power tilted and few people saw it coming. Signals from the United States and Israel had hinted at tension with Iran, yet the scale and speed of what followed caught diplomats, traders, and analysts off guard. Now, with statements from President Trump raising the stakes and markets already reacting, the real story is not just what happened, but what it may set in motion next. Our Chief Investment Officer, Jeff Brummette, takes a closer look at what has been going on and the potential impact of an escalating conflict.
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On Saturday, February 28th, the United States and Israel launched “Operation Epic Fury”, a large-scale, coordinated air and missile attack targeting Iran’s leadership and strategic military infrastructure. While President Trump had been threatening Iran if they failed to negotiate in good faith this assault came as a surprise to the world. President Trump has indicated he wants nothing less than regime change in Iran.
The strikes, initiated in the early hours of the morning, resulted in the killing of Iran’s Supreme Leader, Ayatollah Khamenei, along with several senior military figures, including the head of the Iranian Republican Guard Corp and the army’s chief of staff.
Iran responded by launching missiles across the region, striking not only U.S. and Israeli targets, but also Jordan, Iraq, Saudi Arabia, Bahrain, Kuwait, the UAE, Oman, and Qatar. The attacks have caused damage to civilian infrastructure, including hotels and airports, prompting widespread air-travel disruption throughout the Gulf.
Financial markets have reacted swiftly to the escalation. Oil prices surged by over 10% at one point, reflecting heightened geopolitical risk, while the U.S. dollar strengthened modestly. Global equity markets declined by 1-2%, mirroring investor concern over the potential for broader regional instability and further escalation.
Brent Oil Futures ($/barrel)
Source: Bloomberg Finance L.P.
Index-level performance is obscuring significant sectoral moves beneath the surface. Defence, commodities, energy and mining stocks have rallied sharply, while travel, hospitality and most consumer cyclical stocks have come under pressure.
As is typical during Middle Eastern conflicts, the central risk is a meaningful disruption to regional oil supply. Although Iran has stated that it does not plan to close the Strait of Hormuz, the vital shipping channel between the Arabian Peninsula and Iran through which roughly 20% of the world’s crude oil supply flows, the situation on the ground tells a different story. Global shipping firms are already rerouting vessels away from the area, effectively constraining access and creating a de facto closure. A sustained shutdown of the Strait would place severe strain on global oil supplies.
Additional risks remain. Iran could target oil production facilities across Gulf states, creating a longer lasting reduction in oil supplies and driving oil prices even higher. A prolonged period of higher energy prices would weigh heavily on global economic activity, raising the risk of a recession. Inflation would likely increase in the near term, but we expect central banks to look through this supply driven shock and respond to weakening growth rather than respond with further rate hikes.
It is impossible to predict how this will all unfold. Key questions remain unanswered: Could this ultimately lead to regime change in Iran? If so, would new leadership be more willing to engage with the West? Might Iran become a commercial partner of the West rather than an adversary? Such an outcome would be positive for both Iran and the global community, but how we arrive there is very uncertain.
For now, this remains a geopolitical risk shock rather than a macro regime shift. Markets will continue to react sharply to headlines, but confirmation of sustained disruption, rather than political posturing, would be required to justify a materially more bearish global outlook. From a portfolio perspective, we are already well positioned with exposure to energy, utilities, defence, miners and gold which provides a degree of resilience against further escalation in energy prices, heightened geopolitical uncertainty and renewed inflation risk.
The price and value of investments and any income that might accrue may fall as well as rise and is not guaranteed. You may not get back the amount of your original investment.
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