The Iran crisis is making markets unpredictable – what can investors do?

It is not easy to say what the Iran crisis means for markets, not least because it changes hourly. I write this on Wednesday; by Friday, anything could have happened, as Monday's near-$30 swings in the oil price have shown.

The logical assumption is that the Iran crisis will pass and energy prices will fall back. This has been the pattern in Middle East upheaval for at least a couple of decades. In that case, there is not much to be gained from fretting about short-term swings. For most of the last two weeks, this has been the consensus among investors. Markets have been much calmer than you might predict, with a few exceptions, such as the pullback in Korea, which has been flying of late. Ignore the hyperbolic headlines about “tumbling” and “plummeting” on drops of 3% or so: stocks have not been panicking so far.

Still, we can think of cases where the impact did not pass quickly (eg, Russia's invasion of Ukraine and, indeed, various events in the Middle East longer ago). That scenario favours US markets and the US dollar over most of the rest of the world in the short term. The US has greater energy security – it is a net oil exporter, and high prices will encourage shale oil producers to boost output. This is already being reflected in markets: the dollar is slightly stronger and US stocks are performing better.

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With that in mind, note that while non-US stocks beat the US last year, it was only in the US where earnings met expectations, points out Paul Niven of F&C Investment Trust (LSE: FCIT). Investors who have run up European shares are keen to see growth come through. The longer the crisis goes on, the less likely that is and the more scope for market setbacks.

Three reasons to fear the Iran crisis becoming a longer war

The obvious reason for optimism is that prolonged disruption to oil exports will benefit almost nobody. Yet if you want to be a pessimist, the three main participants may feel otherwise. Iran could have an incentive to maximise disruption this time because it will make the cost of attacking it again in future seem much higher. Israel might want to continue until Iran's government falls and its military capabilities are destroyed.

The US gains nothing from a protracted crisis that keeps oil prices high, but it seems to have started this fight without a clear plan for finishing it. Markets took Donald Trump's comments about the attack being “pretty much over” as reassuring, but perhaps they should have been spooked by clear signs of an erratic president who did not seem to be in command of the facts.

So the outcome is anybody's guess. All we can say is that the world keeps looking more volatile. There have always been financial shocks (“markets climb a wall of worry”, as the adage goes), but the key difference today is that the geopolitical framework in which we invest is becoming more less stable. One key implication of this is that inflation will be more volatile because supply chains are more easily disrupted. Inflation protection – real assets and stocks with pricing power – will be increasingly important.

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