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As you will be aware, Iran and the US are now at war. It almost goes without saying that the human cost of any conflict far outweighs its impact on financial markets. But this is a finance update, and markets are our domain — so we’ll focus on what we can usefully contribute and leave the broader picture to those better placed to cover it.
The big unknown for the war is how capable and willing the Iranians will be to take the fight to the US and its regional allies like the UAE and Saudi Arabia. So far, they have shown more fight than when Israel and the US attacked in June last year. I do not pretend to know the answer to this nor, I think, does anyone else right now. And until we get some clarity on what the worst case looks like, I think markets will continue to remain under pressure.
The market reaction so far
As I type (Tuesday morning), if you are a sterling equity investor, I would have you down around -2.2% from Friday’s close. If this doesn’t sound much (and in the big scheme of things it isn’t) then part of the reason is the dollar is around 1.5% stronger against sterling (a typical dollar flight to safety move). The UK FTSE 100 index is down -3.8%.
The real economic risk is that Iran disrupts oil flowing through the Strait of Hormuz. Around 20% of the world’s oil exports flow through Hormuz along with plenty of gas exports destined for the UK and Europe. So far, at least three tankers have been struck and, understandably, insurers and shipping companies are reluctant to sail through the Strait given the state of the war. So we have a de facto closure. And with the US talking tough last night the Strait might stay closed for a while.
Brent oil is therefore up to $82 a barrel this morning from $60 at the start of the year. This puts pressure on inflation (which was expected to keep steadily falling in 2026) and so limits central banks’ ability to cut rates. Bond yields are higher and bond prices are lower this week. The markets are trading like this is an inflationary shock in a (very contained so far) re-run of the sort of unpleasant price moves we saw in 2022.
Some potential scenarios
In terms of what plays out from here I repeat the basic uncertainty of how willing and capable Iran are to fight back. There are, however, a few scenarios to think about. I would rank these in descending order of likelihood:
- No real regime change. Iran stays hardline anti US and intent on causing disruption in the region. This feels most likely to me. In this case, the purpose of the war will be to limit the Iranians’ ability and willingness to cause trouble. And I would expect the current US formula of “wait, negotiate and if no-deal then bomb” to continue for a while.
- Same regime but willing to do a deal. This would probably be better than scenario 1 but would need the hard-liners to yield some power. This would also be a good market outcome longer term.
- New regime via a successful uprising. I haven’t seen much of evidence of this yet and history (most obviously Vietnam) does not have many examples of bombs being a successful way to engineer the regime you want.
- Regime collapse, civil war. For a humanitarian and stability point of view seeing a country of 80 million people go the same way as Syria would be a tragedy but it is not obvious that any new regime would be strong enough to avoid it.
I would add that the Iranian regime feels pretty precarious today and remains reliant on the money it receives from keeping the Strait of Hormuz open. My best guess is that this will, one way or another, eventually be the case. This, and the fact that the world remains relatively well stocked with oil today, is limiting the downside moves we have seen so far in equity markets.
Our strategy
If scenario 1 feels the most likely then question is how long the US and Israel will be willing to go on the attack. Here domestic politics and the upcoming mid-term elections will surely limit Trump’s ability to prolong the war. Trump’s approach is often maximalist demands and attack, followed by some sort of climb down. Just eliminating Ali Khamenei (as they have done) might be enough for the US to claim victory. And a man elected to bring inflation down should not be pushing oil prices up for too long by causing real trouble in the middle east.
hen the Iranian playbook for this war becomes clearer, then I would expect markets to start to recover. I cannot, however, predict how long this will take. All I can do is present, without too much comment, previous geo-political shocks, their short-term impact on US equity markets and where they were 12 months later.
Finally, a comment on the benefits of diversification. US equity markets have a large exposure to technology businesses and plenty of the AI winners and losers. For those that have wished to diversify away from all things AI, the rest of the world (and especially emerging markets) have offered plenty of rich pickings recently. I would say that this shock has, so far, seen that benefit reverse. The US is a net exporter of energy, so it is much less affected by rising prices than the energy-importing UK and Europe. And emerging markets and Japan look much more vulnerable to an oil-driven cyclical slowdown than, say, US technology businesses.
This means many of the winners of the last 12 months have been hit harder (so far) by this shock. It is often tempting to throw out the losers and only ride the winners. But geographical diversification was alive and well in 2025 and has proved its value again so far in 2026.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
