Financial markets have given up most of their year-to-date gains as the Israeli-US war with Iran significantly disrupts global energy markets, leading to a substantial spike in the oil price and dimming the prospect of further interest rate cuts by central banks.
Does this kill the bull case for equities? Most investors entered 2026 buoyed by the prospects of further rate cuts from the US Federal Reserve and other central banks, and a welcome rotation into emerging markets as the prospect of a global recession receded and risk appetite returned.
Have events over the past fortnight changed everything? If I had to risk summarising market sentiment in a paragraph it would say US President Donald Trump will probably seek an offramp soon (those pesky mid-terms are coming), and that Iran is only a temporary menace, so some compromise will be found to open the Strait of Hormuz. Anyway, Iran will soon be in no position to threaten anyone.
In other words, do not jump back in just yet, but everything should be fine soon. Is this too complacent? The standard playbook from financial markets (and apologies if this downplays the humanitarian catastrophe) is that geopolitical events are usually not long-lasting, or quickly become irrelevant and consequently offer investors chances to benefit from short-term volatility.
After all, the global economy has proved resilient to the Russia-Ukraine war (which seemingly is in a stalemate, so it can be ignored) and last April’s “Liberation Day” tariffs (which were watered down sufficiently to be shrugged off). Why should the Israel-US war with Iran be any different?
This view might continue to be correct. The Iranian regime is incentivised to survive, while the US regime will eventually seek an offramp. The Israeli incentives are more complex (it has less incentive to stop the war), but it probably will not have the final say.
What if the shock is not fleeting? The Strait of Hormuz accounts for 20% of global oil and liquefied natural gas supply, and Iran has essentially throttled it. At some point, maybe sooner than we think, economies will need to ration energy. Some economies, including South Africa, are more exposed than others.
Are we facing the big recession risk? Perennial bears, and those who called 2008 correctly, are again getting column inches in the Financial Times. While the tail risk of a global recession is clearly higher than it was two weeks ago, it is too soon to know if we are heading for one. If this blows over, it blows over.
What if the shock is not fleeting? The Strait of Hormuz accounts for 20% of global oil and liquefied natural gas supply, and Iran has essentially throttled it. At some point, maybe sooner than we think, economies will need to ration energy. Some economies, including South Africa, are more exposed than others.
A more useful question perhaps (this is the argument of more thoughtful bears) is whether one thinks the global economy is becoming more or less fragile through the repeated shocks it has experienced over the past few years. Fragile systems are less likely to shrug off the next shock. Anti-fragile systems grow stronger through repeated shocks.
The US economy is often regarded as the definition of anti-fragile. No matter what is thrown at it, the US consumer always seems to bounce back. However, even in the US there are signs in labour and credit markets that strains are starting to build. Could $1.31 a litre push it over the edge?
The global trading and energy system looks more fragile, and the repeated shocks it has endured at the hands of Trump are potentially more terminal. What are we building in its place?
Last month I applauded the pragmatism of South Africa’s domestic policy in addressing key vulnerabilities but said our foreign policy remained largely rhetorical. If anything, events of the past few weeks have highlighted the need for foreign policy pragmatism to secure our interests and improve our resilience.
How much pain can you tolerate if geopolitical risks escalate? Will your portfolio be able to benefit from the inevitable mis-pricings if these fears prove overblown? This talks to the importance of taking a balanced, diversified view.
The crisis will create opportunities for asset managers to exploit, provided your overall portfolio can cope.
• Crosoer is chief investment officer at PPS Investments.
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