Over the weekend (and continuing as we type), the United States and Israel launched coordinated military strikes against Iran, targeting missile infrastructure, air defence systems and senior political and military leadership. As we understand it, Iran’s Supreme Leader, Ayatollah Ali Khamenei, was killed in the initial strikes, and Iran has announced 40 days of official mourning. Many of Iran’s senior military personnel are also dead.
Iran’s Islamic Revolutionary Guard Corps (IRGC), Iran’s military force, have vowed retaliation, seeing it as a “legitimate duty and right” and plans what it describes as “the most ferocious offensive operation in history” against Israeli and US operations in the region and in nearby countries. So far, Iran’s response has been swift. Iranian forces launched ballistic missiles and drones targeting Israel and US military assets across the Gulf. This includes bases in Qatar, Kuwait and Bahrain. While most of the missiles have been shot down, a few have got through, with three US servicemen reported to have been killed and Trump warning “there will likely be more”. This all suggests that the initial Iranian response has had a limited impact.
From a geopolitical perspective, the headlines are significant. From a market perspective, the focus will be on whether oil supply is cut, and especially whether flows through the Strait of Hormuz (the transit point of c20% of global seaborne oil) are disrupted, and for how long.
What would likely be the short-term impact on markets? The impact is as we expect: the FTSE has opened marginally down (-0.8%), alongside Asian markets: the Hong Kong and Japanese indices are down 1.4% and 1.5% respectively. The major losers are probably airline stocks, hospitality companies and banks. We might expect bond markets to struggle should inflation fears increase. US technology stocks may also fall if inflation fears re-emerge in the US. By contrast, the near-term winners are likely defence stocks, energy companies, oil and gold. Oil prices are up 8%. But as you can see, the moves are not significant, because the long-term impact on stock markets is unlikely to be significant unless things escalate meaningfully. As we have mentioned before, the market impact of these events tends to be temporary and less severe than the headlines would have us believe. History has repeatedly shown that staying invested has usually been the most sensible option for long-term investors. We will be closely monitoring markets and keeping you updated should anything change.