The recent escalation involving the US, Israel and Iran has added a significant geopolitical risk premium to financial markets, with banks cautioning that a prolonged conflict could prompt investors to rebalance portfolios towards emerging market assets and gold as a hedge against uncertainty.
“In this environment, discipline and a tilt towards defensive quality remain prudent,” said Mathieu Racheter, head of equity strategy research at Julius Baer.
In a recent report, Swiss bank UBP said the main channel through which the Iran conflict could affect financial markets is likely to be oil prices.
“While financial conditions remained broadly supportive through February, a sustained surge in crude prices could reshape expectations for interest rates in 2026 if higher energy costs begin to drive wider inflationary pressures,” the bank noted.
Portfolio adjustments
Analysts noted that the key transmission mechanism for equities is energy—particularly oil and liquefied natural gas—rather than direct trade exposure. A prolonged rise in oil prices could tighten financial conditions, squeeze corporate margins and revive concerns about stagflation, even though the global economy is less dependent on oil than in the past.
UBP said the global economic backdrop currently remains supported by accommodative policies and resilient corporate earnings, which helps prevent a major shift in the base economic outlook.
The bank added that it has increased its exposure to gold in the past two weeks.
“At the portfolio-construction level, we emphasise risk mitigation through our positive view on gold, as its convex profile offers valuable protection despite current valuations,” it said.
According to UBP, sectors most vulnerable to prolonged energy cost pressures include cyclical industries, consumer-focused sectors, chemicals and transportation.
Racheter noted that oil and gas stocks have historically offered partial protection against supply-driven price spikes.
“This is an area investors may want to consider from a portfolio-construction perspective, even though we are not actively recommending an overweight position,” he said.
Meanwhile, Elliot Hentov, head of policy research at State Street Investment Management, said regional equity markets appear to expect the conflict to end relatively quickly and leave Iran in a weaker position.
“Similar to the earlier 12-day conflict, Israeli equities have rallied on expectations of a significantly weakened Iranian regime,” Hentov said. “GCC markets have seen some declines, but given the unprecedented attacks on their territory and direct disruptions to economic activity, the losses remain modest, suggesting investors do not anticipate lasting economic damage.”
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