Chaos is not a ladder

The first thing to say is probably that the Iranian attack was a big surprise. Actually, that’s probably an overstatement. There definitely appeared to be some people making bets on Polymarket and Kalshi who seemed to think something was about to happen. But for equity market investors, this was a bolt from the blue (just ask Korean investors, where the KOSPI index was down nearly 20pct in the first two trading sessions following the strikes).

Interestingly, crude oil markets were pricing some heightened (upside) risk to prices ahead of the strikes on Iran, suggesting that participants in those markets were increasing the probabilities of something kicking off and hedging themselves as a result.

Geopolitical shocks are difficult to navigate. Very, very, very few people actually know about these kinds of things (although many people talk as if they do know).  And even if you manage to guess the shock event correctly, you then face the equally tricky problem of deciding how markets will reprice the economic and practical impacts.

The complexity of market drivers has real influence here. Consider that even something as ‘simple’ as safe-haven gold prices have fallen since the weekend, while speculative Bitcoin has rallied. Is this simply investors selling their (strongly returning) defensive asset to rotate into things that have now sold off?

However, it is important to maintain perspective. A Goldman Sachs study found that over the past 40 years, in the 21 instances where the US conducted military strikes in the Middle East, equity markets were up over the next 2 months in 95% of cases. The moves we have seen so far have been muted in most markets (except for energy markets). Major equity markets have fallen approx. 3-4% in local currency terms with the US basically remaining flat, and EM the worst having lost around 8%. Small mercies in that, as GBP investors, Sterling weakness (mainly versus the $) has helped to mitigate some of those losses. At any rate, given the range of moves we’ve seen it seems unlikely that (m)any clients’ financial expected outcomes will have meaningfully shifted.  

The reality is that although there has been a lot of fire and noise, there is still too much uncertainty to really know yet how this will feed into economies, companies and markets. Now is the time to remain on the lookout for opportunities, and to ensure we are integrating actual data as we receive it. But we must always remember to remain mindful of our clients’ long-term goals and to resist change if we remain on the right track.