Five decades of oil shocks show crises redistribute value rather than destroy it

History shows investors who identify whether a shock is temporary or structural will be the ones who capitalise, says Flagship Asset Management

As markets reel from renewed Middle East tensions and the threat of an oil supply shock, investors who equate geopolitical crises with uniform portfolio destruction are misreading history, according to James Hayward, global fund manager at Flagship Asset Management.

“Geopolitical shocks don’t simply destroy value; they redistribute it,” said Hayward. “Every crisis that has rattled the global economy over the past five decades has produced winners on the one hand and punished some sectors on the other. Understanding this process might give investors a sense of relative calm during periods of market turmoil.”

Hayward points to a consistent pattern across five decades of oil shocks, military conflicts and security events: supply disruptions inflate the price of the disrupted good; military escalation drives spending towards defence and away from consumer discretionary stocks; and financial crises send money towards hard assets and away from paper ones.

Five decades, one consistent playbook

Flagship’s analysis spans the 1973 and 1979 OPEC oil embargoes, the 1990 Gulf War, the post-9/11 decade of conflict, the 2014 oil price collapse, and Russia’s 2022 invasion of Ukraine. Across each episode, the same rotation logic was evident.

During the 1970s oil shocks, oil majors including Shell, BP, Exxon and Mobil saw profits surge as prices quadrupled from roughly $3 per barrel to above $12. Airlines and the US auto industry, caught flat-footed by fuel-efficient Japanese competitors, were among the most severely punished.

The 1990 Gulf War saw oil double over three to four months, lifting energy stocks and defence contractors before collapsing sharply once the conflict was resolved within seven months. In 2022, Russia’s invasion of Ukraine drove the S&P 500 Energy index up roughly 65% in a year when the broader index fell about 18%, while also triggering a multiyear European defence spending overhaul.

“The duration of a shock matters enormously,” said Hayward. “Short conflicts create volatility; prolonged disruptions create structural change. The 1970s oil embargoes were a weaponised structural constraint, which is categorically different from the Gulf War, which was resolved in months.”

The cost of sitting on the sidelines

Hayward cautions that the instinct to de-risk at the point of maximum fear is historically one of the most damaging investment decisions an investor can make.

“The data consistently shows that investors who panic-sell at the peak of geopolitical fear tend to crystallise losses that reverse within months. The bounce back is sometimes equally as fast as the initial shock, and sitting on the sidelines while the market recovers can be just as painful as having taken the initial hit.”

Instead, Flagship’s framework focuses on identifying which supply chains are disrupted, who produces the disrupted commodity, and who will be paid to restore security. “Inflationary supply shocks favour energy and commodities. Security threats favour defence. Demand shocks favour consumer defensives. The pattern is cleaner than most investors expect, and it has remained remarkably consistent across very different types of crises,” said Hayward.

Reading the current moment

Hayward draws parallels between the current Iran-related tensions and prior supply-side shock events, noting that the key variable, as in previous episodes, will be the duration of the conflict and whether disruption becomes structural.

“The question investors should be asking right now is not whether markets will fall. They may well. The question is whether this becomes a temporary volatility event or a structural shift in commodity supply chains. Those two scenarios have very different investment implications, and very different sets of winners.”