Recent developments in the Middle East have understandably raised concerns among investors. The latest escalation involving the US, Israel and Iran has created tension across the region, and markets have responded mainly through higher energy prices.
Oil prices have risen by around 11% since the weekend, while UK natural gas prices have increased by roughly two thirds. This is largely due to disruption around the Strait of Hormuz, a key shipping route through which about a fifth of global oil and gas passes.
Energy prices matter because they influence the wider economy. Higher fuel costs increase the price of producing and transporting goods and can act like a tax on both businesses and households.
However, it is important to keep the recent moves in perspective. Even after the increase, gas prices remain well below the levels seen following Russia’s invasion of Ukraine. In addition, the UK energy price cap has already been set for the coming quarter, meaning household bills would not be affected by the current situation until at least July.
Much will depend on how long the current tensions last. If the conflict proves short lived, energy prices could quickly fall back and the impact on markets may be limited. If it drags on, markets may experience periods of volatility and interest rate cuts could be delayed.
Rather than trying to predict geopolitical events, our investment approach focuses on building well diversified portfolios that can perform across different economic environments.
This includes exposure to a range of sectors, regions and currencies. For example, defensive sectors such as healthcare and consumer staples have held up well recently, while energy and resource companies have benefited from rising commodity prices.
Although markets have seen modest declines in recent days, moves of this size are not unusual. Historically, geopolitical events rarely have a lasting impact on long term market returns.
For long term investors, staying disciplined and maintaining a diversified portfolio remains the most important principle.
