The escalation of hostilities in the Middle East represents a material geopolitical shock for markets. While the scope of the conflict already exceeds the 12-day confrontation of June 2025, it is not – at this stage – world-changing. The situation remains fluid, and our investment views may evolve as events unfold. That said, our clients’ portfolios are constructed to withstand shocks, and heightened volatility can create opportunity alongside risk.
Following US and Israeli strikes on Iran and Tehran’s subsequent retaliation, the conflict in the Middle East is already wider and more consequential than the 12-day war between Iran and Israel in June 2025. Senior Iranian leadership – including Supreme Leader Ayatollah Ali Khamenei – has been killed, regional airspace has closed and rhetoric from Washington suggests ambitions that extend beyond nuclear deterrence towards pressure for regime change.
Even so, history suggests that restraint is likely to assert itself. Regime change rarely occurs without boots on the ground, and there is little evidence that the US has either the appetite or the political mandate for a prolonged ground war. Domestic political constraints, sensitivity to oil prices and the need for congressional approval all argue against it.
China and Russia have, thus far, remained on the sidelines. If this holds, the fighting is likely to remain confined to the Middle East and to conclude relatively quickly. Direct involvement by either power, while unlikely, would materially raise the risk of a wider confrontation.
While we expect the current situation to last longer than last year’s 12-day war, the most probable outcome remains a contained conflict followed by a negotiated ceasefire rather than outright escalation. The United Nations has limited leverage, but may yet play a role in facilitating a diplomatic off-ramp.
The Strait of Hormuz appears to be temporarily and unofficially closed. While a prolonged disruption can’t be ruled out, we see the probability of a sustained closure as low – less than 25% – given China’s heavy reliance on imported oil. Around 17% of global oil supply transits the Strait, making any extended blockage economically costly for all major stakeholders.
Implications for investors
The outlook remains fluid, and the facts on the ground may change quickly. As events evolve, so too may our investment views. For now, the most immediate impact on markets is via energy. Oil prices have already jumped, but if our loosely-held base-case assumptions are correct, they should ease back towards US$70 if and when a ceasefire is reached.
The key risk lies in disruption to flows through the Strait of Hormuz. Were such flows to fall sharply – from around 17 million barrels per day to nearer 7 million – oil prices could spike sharply in the short term before settling closer to US$90 should a partial closure persist. Our baseline view remains that the Strait will not be closed for any prolonged period.
For South Africa, higher oil prices are negative for the economy and the balance of payments, partially offset by higher gold and platinum prices. On balance, persistently elevated oil prices would slow the speed of our ‘virtuous cycle’ narrative for South Africa.
Heightened geopolitical uncertainty typically drives a risk-off response across financial markets. Thus far, markets don’t seem unduly worried, but participants will be on edge. Volatility is expected to rise, though history suggests it should subside once a ceasefire is in place. A sustained increase in oil prices would, however, lift global inflation, reducing the scope for the US interest-rate cuts that we expect late this year.
The roughly 2% rise in the gold price has been more muted than we would have expected, but further gains are likely should hostilities intensify. Given that platinum is currently behaving like a precious rather than an industrial metal, it will likely move in line with gold.
For now, with the conflict likely contained and, we hope, short-lived, we don’t anticipate major market disruption, though we remain highly vigilant.
Positioned to absorb shocks
Against this backdrop, our clients’ portfolios are specifically designed to absorb shocks. Equity exposure across our strategies is deliberately defensive, and our balanced portfolios are designed to have multiple sources of uncorrelated returns. As always, periods of heightened volatility can create opportunity as well as risk, particularly where price moves become detached from longer-term fundamentals.
