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US-Iran Escalation: Global response likely as energy disruption rises
- Middle East escalation has increased economic risks, with attacks on Gulf energy infrastructure driving oil prices above $100 and tightening financial conditions
- Disruption to the Strait of Hormuz is critical, affecting roughly 20% of global oil consumption, 25–30% of LNG trade and key metals and fertilisers
- Markets are repricing from a temporary shock to a more persistent, stagflationary outlook, particularly for Europe, the UK and Asia
- The policy backdrop is more favourable than in 2022, with lower inflation and higher starting interest rates giving central banks greater flexibility
- We are staying the course whilst remaining flexible, and continue to monitor closely for signs of de‑escalation which could create opportunities for selective portfolio rebalancing
Further escalation in hostilities across the Middle East has increased the potential economic impact, triggering a renewed bout of market volatility. Recent attacks on energy infrastructure in Iran, Qatar and across the surrounding Gulf region have compounded the effective closure of the Strait of Hormuz, a critical chokepoint for global commodity markets. Oil prices have moved decisively above $100, whilst global equity markets have weakened and bond yields have repriced higher as investors scale back expectations for rate cuts and increasingly price the risk that inflation persistence constrains central bank flexibility.
Energy disruption remains central
Disruption to the Strait of Hormuz remains central to market expectations and extends well beyond oil alone. Estimates suggest that around 20% of global oil consumption, equivalent to roughly one quarter of seaborne oil trade, normally transitsthe strait. In addition, close to 25–30% of global liquefied natural gas trade, primarily from Qatar, passes through the same route. Beyond energy, the strait is also critical for industrial and agricultural inputs, including a significant share of aluminium, copper and steel feedstocks, as well as an estimated 15–20% of globally traded fertilisers, notably urea and ammonia produced in the Gulf.
As a result, prolonged disruption risks feeding through not only to fuel prices, but also to broader input costs across manufacturing and food supply chains. Despite sustained US‑led diplomatic and military pressure, there is limited evidence that energy flows are meaningfully normalising through the strait. The extension of attacks to regional infrastructure increases the probability that disruption persists for longer than initially assumed, even if outright escalation remains contained. Markets are therefore beginning to reflect the risk of a more prolonged period of disruption.
Markets shift to economic impact
This escalation helps explain market behaviour in recent days. What was initially treated as a temporary terms‑of‑trade shock is increasingly being priced as a more persistent, incrementally stagflationary event, with growth expectations marked down and inflation risks revised higher. This dynamic is particularly challenging for Europe, the UK and Asia, where reliance on imported energy and industrial inputs leaves economies more exposed to sustained pressure on real incomes, margins and trade balances.
Such an environment inevitably draws comparisons with 2022, when inflation rose sharply, amplified by Russia’s invasion of Ukraine and the resulting surge in commodity prices. The combination of rising bond yields and falling equity markets proved particularly painful for investors. However, it is important to underscore how different today’s economic backdrop is from three years ago. At that time, post‑pandemic supply chain disruption and strong consumer demand were already generating a powerful inflationary impulse. In January 2022, US CPI inflation stood at 7.5%, whilst the Federal Reserve policy rate was just 0.25%, creating a clear imperative for aggressive monetary tightening.
Today, the equivalent figures are closer to 2.4% for inflation and 3.75% for policy rates, with similar dynamics evident at the Bank of England and the European Central Bank. As a result, central banks face considerably less pressure to raise interest rates aggressively to prevent a sustained inflation overshoot, even as energy prices rise, which should enable a stabilisation in bond yields as uncertainty recedes.
The Strait of Hormuz is too critical to remain closed
Ultimately, the primary source of market volatility is uncertainty over the duration of the conflict and, by extension, disruption to the Strait of Hormuz. Whilst the situation continues to evolve, our approach remains grounded in tried‑and‑tested portfolio management disciplines, with a long‑term philosophy at its core. The current environment inevitably recalls the onset of the Covid‑19 pandemic in March 2020, when economic depression appeared imminent. Yet a coordinated international response, combining extensive policy support and consumer aid, ultimately fostered a swift market recovery despite ongoing economic headwinds.
As the Middle East conflict escalates, the Strait of Hormuz is too critical to global energy, metals and agricultural supply chains for prolonged disruption to be left unresolved. A sustained shock would almost certainly prompt a broader, coordinated international response, likely involving Europe and China alongside the US, aimed at restoring commodity flows.
Importance of flexible, long‑term investing
Against this backdrop, our core message to clients remains to stay the course. Periods of heightened uncertainty and market volatility are uncomfortable but rarely reward reactive decision‑making. Our central assumption remains that the conflict ultimately proves contained, allowing economic and market conditions to stabilise once greater clarity emerges. However, the path to that outcome may be more volatile and prolonged than initially expected. In this environment, maintaining diversification, liquidity and discipline remains the most appropriate strategy. We continue to monitor closely for signs of de‑escalation, diplomatic engagement, and any improvement in energy and commodity flows through the Strait of Hormuz, which could create opportunities for selective portfolio rebalancing as conditions evolve.
Over the longer term, global political leaders and policymakers are likely to reassess geopolitical and energy security priorities, favouring greater diversification of supply and import sources to improve resilience to future shocks. We are actively assessing the strategic investment implications and will provide further detail in our upcoming Quarterly Investment Outlook, due in early April.
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Issued by Stonehage Fleming Investment Management Limited (SFIM). Authorised and regulated by the Financial Conduct Authority (FRN.194382) and registered with the Financial Sector Conduct Authority (South Africa) as a Financial Services Provider (FSP No. 46194).
