Investors seek safe havens as Iran conflict erupts

The US and Israel launching military operations against Iran has taken centre-stage for markets and policymakers this month. US President Trump stated that the objectives of this pre-emptive strike are to prevent Iran from obtaining nuclear weapons and to dismantle elements of Iran’s missile infrastructure, while urging for regime change.

For context, Iran holds 9% of global oil reserves and supplies only around 4% of oil globally, but it is its potential control of the Strait of Hormuz that gives it influence beyond its production capacity - as around 20% of both global oil and seaborne LNG pass through the strait. Prolonged disruption would clearly pose risks to energy markets and oil-importing economies, and have implications for inflation expectations, growth assumptions, and central bank reaction functions. As an example of the impact on oil-importing countries, Taiwan and South Korea rely heavily on Qatari LNG exports as an energy source in electronics manufacturing – showing one of the many interconnected ways in which emerging market economies stand to be affected at least as much as the G7 economies, should the conflict become protracted. Another less-appreciated issue is that much of the global urea production – used in fertilisers – transits though the strait; longer-term closure could thus eventually weigh on farm output.

In the early days of the conflict there was, as expected, a strong flight to quality across the usual beneficiaries. However, many traditional safe haven assets have failed to hold onto their initial gains – with bond yields rising, and gold prices stalling. The USD – ironically the one asset that investors had begun to question as to its function as an immutable store of value – has reverted to its more traditional trajectory during times of geopolitical stress and has performed strongly. We think some of the strength in the USD may fade depending on the extent and duration of the conflict, while the gold price should be underpinned given recent developments.

Asia’s weighted tariff rate has now fallen to 17%

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Source: Haver, Whitehouse.gov, Morgan Stanley, T Rowe Price

In other news over the past month that is of global geopolitical importance, the US Supreme Court ruled that the Trump administration’s use of the International Emergency Economic Powers Act was not a valid legal foundation for tariffs of the breadth and scale imposed by President Trump. While the decision narrows one avenue for tariff action, it does not remove trade as a live policy variable going forward — other statutory pathways remain, but typically they are slower to implement.

Vessel movements through the Strait of Hormuz

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Investment implications – looking for signal rather than noise

Given the developments in the Middle East, we expect a period of further market volatility. The initial impacts will continue to be felt mostly through oil markets and their potential impact on inflation and growth – and the potential implications for central banks’ decision functions.

The longer-term impact will depend on the duration of the conflict. Our baseline view is that the direct military conflict is likely to be relatively short-lived – which should limit the global economic impact and market uncertainty. If the conflict becomes more protracted, central banks may be pushed decisively toward a more dovish stance. While that adjustment would not prevent near‑term volatility, it could ultimately prove supportive for risk assets once the adjustment phase passes.

US earnings – a bright spot is a sea of geopolitical uncertainty

Lost in the recent headlines, US Q4 2025 earnings and revenue results have been quite strong – and have generally come in ahead of consensus forecasts. In line with our expectations, earnings momentum in the US has broadened out beyond the Magnificent-seven mega-tech stocks, even as these companies continue to have very strong earnings growth. The broader S&P 500 universe as well as US small caps have generally reported strong growth over the quarter, reflecting sustained US economic growth.

In recent months, investors have been pricing AI as a competitive pressure on business models, with software a key area of focus. It is worth noting that many software companies at the centre of a recent sell-off have delivered positive earnings surprises and seen upward earnings revisions.

AI hyperscaler capital expenditure guidance has again been revised higher, and investors have increased their focus on the monetisation prospects and outcomes of AI-related spending. While the spending underpins near-term growth and earnings visibility, the ultimate returns on that capital remain uncertain. The market will be more focused on evidence that today’s AI buildout translates into durable returns, and investors have been increasingly differentiating between business models, balance sheets and funding capacity in an AI-enabled economy.

Consumer-related companies continue to report a more selective spending environment - evident in the oft-named “K-shaped” economy - with higher-income households accounting for a greater share of discretionary demand, while lower-income households continue to struggle (and thus spend).

Ensuring portfolio resilience through current and future reckonings

It is worth remembering that markets have endured wars, energy shocks and geopolitical crises before, and long‑term outcomes have rarely been determined by the initial days of turmoil. Taking a 30,000-foot view, we are operating in a rapidly changing world. Along with manifest geopolitical uncertainties, fiscal expansion and rising public debt, along with demographic challenges, are increasingly intertwined with market outcomes. Shocks are becoming more frequent, drawdowns sharper, and recoveries faster – often driven by policy responses rather than economic cycles. In such an environment, static assumptions and reflexive reactions are liabilities.

The key is ensuring that portfolios are built with sufficient liquidity and diversification to absorb short‑term dislocations without forcing poor decisions. In environments like this, the role of portfolio construction comes into sharp focus. Diversification, liquidity and discipline do not eliminate uncertainty, but they do provide investors with the capacity to endure it. And in a world where shocks are more frequent and markets no longer pause, that capacity is increasingly valuable.