After years during which a series of geopolitical shocks – Covid, Ukraine, President Trump’s tariff threat - have taken place, investors will have been hoping 2026 would bring a period of calm and stability in the markets. Unfortunately, once again that hope seems forlorn.
Following weeks of anticipation and build-up, the US and Israel launched air strikes against Iran at the weekend, and the situation has now escalated, with Iran reacting by targeting many of its neighbours in the Middle East.
Unsurprisingly, this action has led to volatility in the markets. Perhaps the most significant impact has been on the price of oil, with Iran controlling key supply routes including the Strait of Hormuz, through which flows around a fifth of the global oil trade. As a result, equity markets have seen some large negative movements, including a nearly 3% drop in the FTSE share index on Monday (although it has already bounced back slightly).
Alongside this short-term reaction, increased oil prices could lead to higher inflation, with consequences for interest rates, government borrowing and bond and equity markets.
This kind of shorty-term volatility can be uncomfortable and unsettling for investors, but it’s crucial they don’t panic: investment decisions made on a knee-jerk basis are seldom the right ones.
Historically markets tend to overreact in the short term, but also recover swiftly. Just 12 months after the start of the pandemic, while the disease was still in full flow throughout the world, many markets had returned to pre-Covid levels. Similarly, markets tumbled when Russian tanks rolled into Ukraine; four years later, with that war rumbling on, markets are at record levels (until this week’s shock, that is).
The message to investors as we face another wave of market volatility is to keep a level head, and bear these three things in mind:
Investing is considered a medium to long-term approach – generally five years and beyond. During such a timescale, day-to-day volatility is pretty much a given.
A diverse investment solution is of paramount importance in protecting investors against that volatility.
Selling assets because of short-term movement in the markets is something to avoid, if possible; you could limit the longer-term growth potential.
That last point is particularly important: reactive selling following a big market fall both crystalises losses and removes the opportunity to benefit from any likely rebound – both of which will damage the long-term returns on a portfolio.
The other point to make is that often this kind of situation is already largely ‘priced-in’ to the market. Certainly fund managers have been talking about the possibility of conflict in the Middle East for many months.
This latest economic shock comes at a time when the underlying UK and global economy is beginning to emerge from a long period of uncertainty, which hopefully will increase its ability to absorb the current instability.
The situation in the Middle East could resolve fairly quickly, or it could, like the war in Ukraine, rumble on. Investors need to keep a calm head and not take any knee-jerk decisions that they may come to regret.