Analysis: How Wars Can Impact Your Investments

Long Story Short: Stock Markets Rise, Eventually

It’s hard to believe this when you’re in the thick of it, but most military conflicts have only a short-term impact on financial markets. Risk assets, such as equities, ultimately prevail.

On average, it takes less than two weeks (13 days) for the S&P 500 index to bottom after a geopolitical crisis and less than a month (28 days) to recover, according to this tally put together by RBC Wealth Management. The average fall from peak to trough is only about 6%.

By design, markets are forward-looking. They try to price the future value of assets. So, once there are signs of de-escalation or clarity around a resolution to a conflict, investors begin to shift their attention to the recovery and profit from depressed valuations.

Key Risk: War Drags On

Where it gets tricky is if there is a protracted conflict. Confidence erodes as the war goes on, and disruptions to energy flows and supply chains eat into economic growth, weighing on earnings expectations. Markets, consumed by imminent and seemingly insurmountable challenges, cannot see a way through the crisis and a path to recovery.

The fundamental question right now is whether the war in Iran will push up inflation and derail global growth. The answer depends on what happens next in the Strait of Hormuz, the narrow stretch of water off Iran’s shore responsible for 20% of the world’s oil shipments and liquified natural gas (LNG). At the time of writing, it is closed down by Iran. How long that lasts will help determine the path ahead for financial markets.

The Bull Case: Peace Prevails, Albeit Fragile

In this scenario, the Strait reopens six to eight weeks into the war. A de facto ceasefire is achieved – either because the US and Israel consider their campaign complete without regime change, with the degradation of Iran’s ballistic missile and naval capabilities, or the Iranian leadership capitulates under pressure. Fighting may continue, but no more fiercely than at the outbreak of the conflict. Markets could see a way through to peace, even if it’s a fragile one.

With supply obstructions removed, investors are reminded that oil remains in oversupply. Oil prices duly correct. Crucially, inflation resumes its downward trajectory, putting interest rate cuts back on the table in the US, Europe, and many parts of the world. The global economy is largely preserved. Markets soon bottom out, as they did in the 1991 Gulf War and 2003 Iraq War.

The military threat could still be an overhang in this scenario, but it will be overshadowed by the market narratives that dominated before the war. The US dollar, in particular, will once again face headwinds from both rate cut expectations and investors diversifying from the US to less concentrated, higher-growth markets. Net importer markets, hard hit by the initial sell-off, would claw back lost ground. In this case, we would expect AI to regain global investors’ focus again.

With the external supply shock resolved, the Australian market’s attention would pivot away from Middle East headlines and squarely back to domestic fundamentals. Inflation will still be centrestage, but the focus will be on local retail spending and the housing market, as well as any pass-through benefits from Chinese stimulus for Australian miners and other exporters.

The Bear Case: Inflation makes a comeback

In this scenario, neither side would de-escalate. Even as the US and Israel ramp up strikes, Iran and its proxies persistently disrupt maritime traffic in the Strait of Hormuz, effectively keeping it shut indefinitely. With no clear route to ship oil, Gulf states freeze production. Oil reserves, initially abundant, deplete in net-importing countries. Oil prices surge and stay elevated, inflation jumps, economies crater, and industries suffer across the board.

A week into the war, part of this scenario is beginning to play out. Gulf production could be halted within days, Qatar has warned. Analysts at JPMorgan had expected this to happen weeks into the conflict. Markets are moving rapidly to price in the risk. Oil prices came close to testing US$120 a barrel, which would be the highest in more than a decade and a half. This run-up is already steeper than the one in the early stages of the war in Ukraine.

The prospect of a long war is significant as it is upending several popular trades. Going into 2026, markets had expected dollar weakness to persist, setting up emerging markets for another year of outperformance. Hardware-heavy developed Asian markets have performed well as investors seek to diversify away from the US but stay exposed to AI-driven growth.

These tailwinds are all at risk from a protracted conflict that would stoke inflation, stifle rate cuts, and send investors chasing the greenback as a safe haven. The sell-off in Asia, where China, India, Japan, and Korea are all net importers, has been particularly painful.

While Australia is a net exporter of energy, it imports more oil than it exports. Westpac projected petrol prices could rise between A$0.25 and A$1.00 per litre. Analysts at the bank warned that prolonged disruptions in the Strait of Hormuz, lasting over a month, could add one percentage point to the Consumer Price Index (CPI) and shave 0.2 percentage points off GDP growth.

Higher inflation generally means lower consumption and investment, as households tighten their belt and financing costs stay high. This would further complicate efforts by the Reserve Bank of Australia’s campaign to rein in prices, which were already sitting outside the central bank’s target range before this war began. Analysts at Bank of America believe the RBA will bring forward rate hikes to next week’s meeting. Find out more about the RBA’s challenge here.

For the global economy, the biggest risk is a reversal in US inflation, which, incidentally, was intensified by another war just a few years ago. Progress in pushing down prices has been hard-won. Even if the new Fed chair is inclined towards rate cuts, he and other voting members of the Federal Open Market Committee would have to contemplate the effects of elevated oil prices. In the futures market, traders are raising the probability of the Fed resisting rate cuts as far out as July.

Three Tips for Navigating Volatile Times

1. Diversification remains the best defence. Gold has served as a strong buffer and driver of returns. Investors with a broad portfolio across geographies and asset classes should be better protected. Equities in the US, a net exporter of energy, have been holding up better than those in Asia of late.

2. Discipline matters. Investors have been used to dip-buying whenever there is a correction in the market in the past few years. But that phase of broad equity gains, fuelled mostly by AI, is behind us. Markets are less forgiving as concentration builds and valuations get stretched. Selection and quality will form another line of resilience in a diverse portfolio.

3. Focus on fundamentals. If history is any guide, the unfolding crisis will unlikely remain the market’s focus three years from now. But the impact of AI will likely be more pronounced in that timeframe, with real productivity gains and fresh impetus for growth. Viewed in that prism, markets will eventually return to evaluating fundamentals, however volatile it gets in the interim.

Relevant ETFs On Selfwealth

The energy sector will continue to be in focus in the weeks ahead.

• VanEck Australian Resources ETF (ASX:MVR): Broad exposure to the largest Australian energy producers and miners. 

• BetaShares Global Energy Companies ETF - Currency Hedged (ASX:FUEL): Global exposure, tracks international energy giants, hedged against AUD currency fluctuations. 

Gold and gold miner ETFs have been in demand as investors look for safe havens:

• Global X Physical Gold (ASX:GOLD): Tracks the AUD spot price of physical gold and is backed by bullion stored in London vaults.

• VanEck Gold Miners ETF (ASX:GDX): Provides exposure to a basket of the world's largest gold mining companies, including Australian companies.

Banks and other financials could regain attention if investors shift their focus back to domestic factors and the RBA’s rate path:

• VanEck Australian Banks ETF (ASX:MVB): Exposure to the "Big Four" banks and other major financial institutions.

• BetaShares Australian Financials Sector ETF (ASX:QFN): Tracks the wider financials sector, including insurers.