Middle East Conflict: What It Means for Markets, Australia, and Your Portfolio.

Executive summary – one week on

In our update to clients last week, we noted that markets were responding to the Middle East conflict primarily through energy prices, inflation expectations, interest rates and investor risk appetite, rather than through a deterioration in global economic fundamentals.

Since then, that assessment has largely held. Volatility has remained elevated, oil prices have stayed sensitive to headlines, and defensive assets such as gold have continued to attract interest. At the same time, markets have avoided panic. This reinforces an important message for investors: markets are processing uncertainty, not pricing in a worst‑case outcome.

This follow‑up update builds on last week’s commentary, outlining what has changed, what has not, and how professional portfolio managers typically position through periods like this—particularly with relevance to Australian investors.

What has changed since last week

The most notable development over the past week has been persistence rather than escalation. Markets are increasingly focused on whether disruptions to energy supply or global shipping routes become prolonged, rather than reacting to each individual headline.

Oil prices have remained elevated, reflecting ongoing risk around the Strait of Hormuz, while equity markets have continued to move in a choppy, range‑bound fashion. This pattern suggests investors are recalibrating expectations rather than exiting risk assets wholesale.

Importantly, there has been no material shift in central bank messaging. Policymakers globally remain alert to inflation risks but are not yet treating current conditions as a structural inflation shock.

Global market impacts

Equities: Global share markets have continued to experience higher day‑to‑day volatility. Investors have shown a preference for defensive and quality exposures while trimming more cyclical and highly valued growth stocks. This is consistent with behaviour seen in previous geopolitical episodes, where markets seek earnings resilience rather than abandoning equities altogether.

Oil and inflation: Energy markets remain the key transmission channel. Elevated oil prices increase input and transport costs and keep inflation expectations in focus. For now, markets appear to be pricing in risk premiums rather than a sustained supply crisis.

Bonds and currencies: Defensive flows into government bonds and the US dollar have occurred intermittently, but these moves have not been one‑directional. This reflects uncertainty rather than a decisive flight to safety.

What this means for Australia

As we noted in last week’s update, Australia is geographically removed from the conflict but economically connected to its consequences. Over the past week, the key transmission channels have become clearer:

• Fuel and transport costs: Elevated oil prices continue to flow through to petrol prices and freight costs.

• Inflation and interest rates: The Reserve Bank of Australia remains in a position where it must balance easing growth conditions against the risk that energy‑driven inflation proves sticky.

• ASX sector rotation: The local market has continued to show relative strength in energy and gold‑related stocks, offset by softer performance in banks, travel and high‑growth sectors.

This pattern reflects caution rather than stress, and remains consistent with historical market responses to geopolitical uncertainty.

Why gold and defensive assets remain in focus

Gold has continued to feature prominently in market commentary over the past week. This reflects its traditional role as a diversifier during periods of geopolitical and macroeconomic uncertainty, rather than a signal of imminent crisis.

Gold prices have been volatile—rising during periods of escalation and consolidating as risk sentiment stabilises. For diversified portfolios, gold’s role is not about forecasting outcomes, but about reducing portfolio volatility when correlations between risk assets rise.

How professional portfolio managers respond in periods like this

As highlighted in our previous update, experienced investment managers tend to follow disciplined, repeatable principles during geopolitical stress. Over the past week, these principles have remained firmly in place:

• Avoiding knee‑jerk reactions to headlines

• Maintaining diversification across asset classes and regions

• Emphasising quality companies with strong balance sheets and pricing power

• Using volatility selectively as an opportunity to rebalance rather than retreat

Most large diversified managers continue to view the current environment as one of heightened uncertainty, not a breakdown in the global investment landscape—unless energy supply disruptions become severe and sustained.

What this means for diversified SMA strategies

In practical terms, diversified SMA portfolios—such as those managed by groups including Elston and Shaw and Partners—are typically positioned to:

• Maintain broad global diversification

• Actively manage risk through rebalancing rather than market timing

• Retain selective exposure to real assets and inflation‑resilient sectors

• Stay aligned with long‑term client objectives, rather than short‑term news flow

These strategies are designed to remain robust across a range of scenarios, not to predict geopolitical outcomes.

The bottom line for investors

One week on from our last update, the key message remains unchanged. Geopolitical events create uncertainty, volatility and unsettling headlines—but they rarely derail well‑constructed long‑term investment strategies.

Markets are currently digesting risk, not signalling systemic failure. For investors, the most effective response continues to be discipline: remain diversified, stay focused on long‑term goals, and avoid making major portfolio decisions based on short‑term developments.

If you are feeling uneasy about recent market movements, or are concerned that your portfolio may not be aligned with your long‑term goals, we encourage you to get in touch.

A short 15‑minute check‑in can often provide clarity and reassurance, or help identify whether any adjustments are needed. Click here to book a 15-minute chat.

General information only. This update does not constitute personal financial advice.