Recent tensions between the US, Israel and Iran have injected a significant geopolitical risk premium into the market, with banks warning that a prolonged conflict could necessitate a realignment of portfolios towards emerging market assets and gold as a risk hedge.
“A tilt towards discipline and defensive quality remains prudent in this environment,” said Mathieu Lacheter, head of equity strategy research at Julius Baer.
Swiss bank UBP highlighted in its latest report that the main spillover of the Iran conflict to financial markets is likely to occur primarily through oil prices.
“While broad financial conditions remained supportive through February, a sustained rise in oil prices could lead to a recalibration of interest rate expectations for 2026 if energy costs begin to fuel broader inflationary pressures,” UBP said.
Portfolio realignment
Analysts stress that for stocks, the critical transmission channel is energy, both oil and liquefied natural gas, rather than direct trade exposure. A sustained rise in oil prices would tighten financial conditions, squeeze interest margins and reignite stagflation concerns, even in a structurally less oil-intensive global economy.
According to UBP, the global economic backdrop is currently characterized by supportive policy settings and resilient corporate earnings, which “prevents fundamental changes in the baseline scenario.”
The bank has increased its gold holdings in the past two weeks.
He said: “At a portfolio construction level, we emphasize risk mitigation through a fundamentally positive view of gold, as its convex profile provides valuable protection despite its current valuation.”
According to UBP, the circular, consumer, chemical and transportation sectors are most exposed to sustained energy cost pressures.
“Oil and gas stocks have historically provided a partial hedge against supply-driven price increases, but this may be an area investors may want to consider from a portfolio construction perspective, even if they don’t actively advocate overweighting them,” Ratcheter said.
Regional stock markets generally see the war ending relatively quickly and Iran in a much weaker position, said Elliott Hentoff, head of policy research at State Street Investment Management.
“Similar to the 12-day war, Israeli stocks rose on news that the Iranian regime was in significant decline. GCC markets may have lost some value, but given that this was an unprecedented attack on territory and a direct hit to economic activity, this was a modest equity loss and also suggests that the local market does not expect any lasting damage,” Hentov said.
(Writing: Bindu Rai; Editing: Sevan Scalia)
bindingu.rai@lseg.com
