Investors Brace for Prolonged Strain Amid Middle East Tensions

Investors worldwide are undertaking a comprehensive reassessment of geopolitical risks in the Middle East following a resurgence of hostilities between the United States and Iran. There is a growing conviction among investors that the ongoing conflict will not be swiftly resolved through diplomatic means but is instead moving toward a prolonged and arduous phase, potentially ending an era of gains in financial markets.

The recent escalation occurred after the U.S. Central Command targeted Iranian military sites, prompting Tehran to launch retaliatory attacks on Thursday. In response, U.S. stock futures rose, while Asian markets generally declined. Meanwhile, oil prices increased by approximately 2% on Thursday but remained below $100 per barrel, as market participants still perceive sufficient safety margins to prevent a full supply shock.

Despite disruptions to shipping through the Strait of Hormuz, alternative export routes, increased U.S. energy exports, and withdrawals from strategic petroleum reserves have collectively mitigated the impact of the crisis. For investors, the primary challenge may lie in adapting to a global environment characterized by persistently high energy costs and sustained elevated borrowing expenses.

Investor Perspectives on Conflict Duration

Billy Leung, a strategic investment expert at Global X ETFs, described the Iranian conflict, which the United States has stated will not be "endless," as potentially evolving into a more complex situation or even an "eternal war." He clarified that the term "eternal war" does not imply the conflict will literally never end, but rather that while societies rarely engage in never-ending wars, the associated risks and consequences may persist indefinitely.

Speaking to CNBC, Leung noted, "With mediation efforts collapsing and strikes resuming, markets have shifted from pricing in a ceasefire to anticipating a prolonged and taxing attrition phase." Each new round of reciprocal attacks diminishes prospects for a diplomatic solution, preparing markets for a long-term struggle. The outcome may not be a sharp, sudden downturn but rather a more sustained scenario, where investors demand higher premiums for geopolitical risks.

Leung emphasized that investors no longer view this conflict as a temporary inflationary shock. Instead, markets are recalibrating capital costs in a world marked by heightened geopolitical uncertainty. He added, "A protracted war ends the era of 'buy everything and reap profits.' With rising energy costs and the real cost of capital increasing simultaneously, profit barriers and hurdles will generally rise for all companies."

Market Stability and Credit Rating Adjustments

Conversely, Benjamin Jones, Global Head of Research at Invesco, indicated that the firm's base case scenario remains the "status quo," characterized by intermittent strikes rather than a full-scale war. He observed that equity markets have largely followed the traditional geopolitical pattern of falling and then recovering. Jones described this as a reminder to investors that maintaining investments often remains the best course amid market volatility.

In a related development, Fitch Ratings downgraded its outlook for the global sovereign rating sector from "stable" to "negative" this week, citing the repercussions of the U.S.-Iran conflict. The agency anticipates that the conflict will weaken global growth, increase inflation and bond yields, and elevate geopolitical risks.

Strategic Stalemate in the Conflict

Andy Lipow, head of Lipow Oil Associates, remarked that both the United States and Iran believe time favors their positions and that neither side has an interest in making concessions beyond the other's red lines. He added, "This deadlock and impasse may persist for a long time, regardless of the scale of bombs the United States drops on Iran."