WEEKLY E-MAIL

17 March 2026

THE MIDDLE EAST CRISIS

By James Malliaros

Markets and geopolitics are both unpredictable, yet entwined.

Financial markets have experienced sharp volatility in recent weeks following the escalation of conflict in the Middle East. For investors, the critical question is not whether geopolitical shocks create short-term market turbulence — history suggests they almost always do — but whether the conflict evolves into a sustained disruption to global energy markets and economic activity.

Markets were already trading at relatively elevated valuations before the conflict, meaning investors were particularly sensitive to any catalyst that could alter the outlook for economic growth, inflation, and central bank policy.

Wars create uncertainty, disrupt lives and generally weigh on economic activity. The duration of the current conflict — and therefore its ultimate economic consequences — remains uncertain.

The first transmission channel: energy markets

When geopolitical conflict emerges in the Middle East, financial markets immediately begin pricing the most obvious risk: disruption to energy supply.

Oil is typically the first asset to react. From there, a familiar pattern often unfolds across global financial markets. Equity markets tend to decline as investors reassess economic growth prospects. At the same time, bond markets may also sell off as rising energy prices fuel inflation concerns rather than fears of slowing growth. At the same time, the US dollar often strengthens as investors seek traditional safe-haven assets during periods of geopolitical stress.

The current conflict is already beginning to follow this pattern. Oil and gas prices have surged amid fears that supply from the region could be disrupted, while global equity markets have weakened as investors reassess the outlook for both growth and inflation.

With no clear resolution currently in sight, investors have become increasingly focused on developments affecting energy supply. Particular attention has centred on oil prices — with West Texas Intermediate rising from approximately US$59 per barrel at the beginning of the year to above US$100 — as well as potential transportation bottlenecks such as the Strait of Hormuz and the risk of broader supply chain disruptions.

Market history suggests volatility is often temporary.

Periods of geopolitical stress almost always generate sharp increases in market volatility. During these moments, investors are often tempted to reduce portfolio risk by raising cash, while more aggressive participants attempt to capitalise on short-term market movements.

However, historical evidence suggests that such reactions are often counterproductive. Volatility frequently spikes around major geopolitical events, yet equity markets have typically recovered once the initial shock subsides.

Geopolitical sell-offs are typically short-lived…

Source: Vanguard

Within 6–12 months, markets are often materially higher.

Attempts to time market movements during periods of stress are also ineffective. The strongest and weakest trading days often occur in close proximity, meaning investors who exit the market risk missing the rebound.

Trying to time the market is futile…

Source: Vanguard

As a result, stepping out of markets during periods of heightened uncertainty rarely proves beneficial, as investors who move to cash often miss the recovery that follows.

Where the economic risks lie

This does not mean the global economy — or certain sectors of financial markets — will be immune from disruption.

Oil price shocks such as the one currently unfolding increase inflationary pressures and raise the possibility of a more aggressive response from central banks.

Asian economies appear particularly vulnerable given their heavy reliance on energy imports from the Gulf region. Approximately 50–90% of oil demand from China, Japan and South Korea is transported via the Strait of Hormuz, highlighting the potential economic consequences should supply disruptions persist.

Should energy markets remain constrained for a prolonged period, the resulting inflationary pressure could complicate the path for monetary policy and place additional strain on global economic growth.

The investor takeaway

In both markets and geopolitics, uncertainty is the only constant.

Successful long-term investors navigate periods of volatility by adhering to investment principles that have consistently proven effective. For portfolios, this typically involves maintaining diversification and focusing on high-quality companies with strong balance sheets and stable earnings.

Businesses with these characteristics have historically demonstrated greater resilience during periods of economic and geopolitical stress.

With volatility already a defining feature of markets this year, 2026 may ultimately serve as another reminder of the importance of maintaining a long-term investment perspective.

Rather than reacting to daily news headlines — whether positive or negative — investors are generally best served by focusing on long-term objectives and maintaining diversified portfolios across sectors, asset classes and geographies.

James Malliaros
Senior Financial Planner
Certified Financial Planner®
SMSF Specialist Advisor™
Authorised Representative No. 291633

If you have any questions or comments, please email me at james@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution.  The information here is of a generic nature, and does not take into account your investment objectives or financial needs.  No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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