Understanding the investment implications of recent Middle East developments
The geopolitical landscape of the Middle East underwent a fundamental shift on 28 February 2026, following the commencement of US President Donald Trump’s “Operation Epic Fury”.
The US-led military intervention aims to neutralise Iranian nuclear threats and dismantle strategic military infrastructure, following the high-friction "Twelve-Day War" of June 2025. With Iran retaliating via missile strikes against US bases and Gulf Cooperation Council (GCC) territories, the conflict has moved beyond a localised skirmish into a major regional escalation. For global markets, the concern, in addition to the kinetic warfare, is the potential for a prolonged disruption of the world’s most vital energy artery: the Strait of Hormuz. (At the time of writing, the Strait remains closed).
The channel is a chokepoint which facilitates the transit of approximately 20–25% of global seaborne oil and one-fifth of global liquefied natural gas (LNG) flows. While historical conflicts in this region have typically resulted in short-term price spikes followed by rapid stabilisation, the current environment presents unique risks. Qatar, which accounts for nearly 70% of Middle Eastern gas exports and 20% of global LNG supply, is particularly exposed. Reports of a halt in Qatari production have already sent European gas prices up by more than 30%.
While OPEC+ has agreed to a modest production increase for April, the majority of global spare capacity resides in Saudi Arabia and the UAE. If the conflict persists or expands, these assets could be compromised, leaving the market without its traditional supply buffer.
The direct impact of an oil shock is twofold: it accelerates inflation while simultaneously weighing on economic growth. On Tuesday, 3 March 2026, market volatility intensified as investors pivoted toward a "risk-off" stance given increased concern that the military action will be prolonged and the impact will be inflationary.
The US economy enters this conflict in a stronger position than in previous decades. The US has become less oil reliant, thanks to a diversified energy mix and increased efficiency. Furthermore, as a net exporter of crude, the US benefits from higher export revenues. However, the US Federal Reserve remains in a delicate position. While central banks typically "look through" supply-side shocks, US inflation remains above target. If energy prices remain elevated, inflation expectations could un-anchor, delaying the highly anticipated cycle of rate cuts. Europe remains significantly more susceptible to these disruptions. The continental economy relies on an industrial cluster supported by stable gas inputs. A prolonged closure of the Strait would pressure the euro and Japanese yen while favouring the US dollar. If de-escalation does not occur quickly, the European Central Bank may be forced to abandon "insurance cuts" to combat rising input costs.
Initial market tremors have seen the US dollar find a strong bid as a safe haven. While gold initially surged, it experienced a reversal alongside US equities. Despite the immediate volatility, historical data suggests that military conflicts, including the US interventions in Iraq in 1990 and 2003, rarely dictate long-term equity returns. Markets are currently pricing in a "sanguine" scenario where de-escalation occurs within months. Under this outlook, the current oil price is manageable. However, a more severe scenario involving a multi-year closure of the Strait would require a total realignment of global energy infrastructure. While high OECD inventories and "crude on water" can bridge a gap of six to eight months, a conflict exceeding this window would trigger a material global recession.
As Operation Epic Fury continues, we are closely monitoring the duration of disruptions in the Persian Gulf. Wars are often unpredictable and how this one plays out remains to be seen, but if history rhymes, then the impact will be limited and temporary.
Furthermore, the impact of these events will be weighed against the broader economic backdrop, including the continued rapid technological revolution driven by Artificial Intelligence and evolving government fiscal policies. The global economy was in good shape and had solid momentum, especially in manufacturing activity. Along with monetary policy easing and supportive fiscal policy, this should limit the downside risks from the war. However, the revival of geopolitical risk has fundamentally altered the 2026 outlook, and we expect increased volatility in the near term. Whether this remains a short-term market tremor or develops into a sustained economic headwind depends entirely on the speed of de-escalation and the security of global shipping lanes. While oil prices have spiked, they remain historically inexpensive and the underlying supply overhang should cushion the overall impact.
