WeeklyWatch – Markets march on despite Middle East flare-up

24^th June 2025

Stock Take

US enters the Iran–Israel fray

Tension in the Middle East continues to ramp up. Despite his two-week deadline rhetoric, it took just two days for President Trump to push the button on a bombing campaign across three nuclear sites in Iran. Unsurprisingly, oil prices spiked as a result, although the market reactions have been muted (so far). But what does US involvement in Iran mean for investors going forward?

Oil, inflation and GDP

After a turbulent few days, the escalation of geopolitical hostilities is raising many questions. The movement of oil prices continues to be a key issue. In the past two weeks, the price has soared by around 20%. Since the Middle East conflict started, the price of a barrel of Brent crude oil has jumped from the mid to low US$60s to over US$81, before settling at around US$78 on Monday.

St. James’s Place’s Chief Economist, Hetal Mehta, says:

“While this increase brings oil prices back to where they were last summer, the sharpness of the move is the key concern, as well as what lies ahead.

“There are various estimates of what the oil price increase does to GDP and inflation. From a US perspective, if this price level is maintained for several weeks, it could add 0.4% to 0–5% on CPI inflation. That is notable in the current context of the US Federal Reserve trying to bring down inflation and amid tariff uncertainty.”

However, at the time of writing, the announcement of a ceasefire between Israel and Iran has resulted in an immediate drop in oil prices.

Looking at the implications for the UK, Mehta points out that even though the weekend surge in the price of oil only moved up to levels seen earlier in the year, “it’s the change that matters – particularly for the UK”. She explains:

“There are different views on this, but generally you’re looking at a drop of a couple of tenths of GDP for a 10% increase in oil prices. No one knows what’s going to happen in the current situation, but when you get these flare-ups, it’s not uncommon for the oil price to go up 50–100%. If the oil price went up 100%, then you can probably take around 2% off UK GDP growth, which would put it firmly into recession territory.”

Dire straights

As well as the oil market being in turmoil, there’s also the possibility of disruption to global supply if Iran retaliates by blocking the Strait of Hormuz. This vital shipping route supports around one-fifth of the world’s oil shipments. If it were to be closed, it could have a huge potential economic impact.

Mehta says the situation in the Strait of Hormuz is a key current consideration for markets and economists. The US has reportedly asked China to put pressure on Iran to avoid any move to close the waterway, but the situation is still uncertain.

Looking ahead

Despite the worrying escalation in the Middle East conflict and fears of what is to come, so far the impact has been “relatively contained”, says Mehta. She continues:

“When you look at the markets, they have been relatively calm following the news of the US bombing of Iran. For example, there has been little reaction from gilt markets. This suggests markets are waiting to see what happens next. There is an upside risk to inflation from the situation and there are potential stresses on the horizon. However, it is too soon to predict economic outcomes with any real certainty.”

The Chief Investment Officer at St. James’s Place, Justin Onuekwusi, agrees:

“We are paying attention and are reassured by our existing stance on resilience across our portfolios. There are macro clouds on the horizon. The price of oil, the impact the Middle East turmoil may have on inflation, stagflation and global trade are areas of concern we are watching. But for now, it’s important not to react and to focus on the long-term. We continue to emphasise portfolio resilience.”

Robin Ellis, Director of Portfolio Management at St. James’s Place, says:

“Our portfolio construction process is built upon a principle of diversification across asset class, geography, sector and region. Through our research, we look to build further resilience, which means broadening the environments within which the portfolios can perform; our aim is to perform well in environments we think are likely, but avoid performing poorly in environments we deem less likely.”

Market snapshot

The FTSE 100 shed -0.9%, while the FTSE 250 dipped just -0.1%. The pound’s recent strength has weighed down the former – given that the bulk of FTSE 100 earnings are generated overseas – but supported the latter, given the domestic-orientated natures of the companies listed on the index.

Across Europe, the MSCI Europe ex-UK index fell by -1.6% in local currency. In Asia, returns were mixed. Japan’s Nikkei 225 rose +1.5%, while China’s Shanghai Composite dropped -0.5% (both in local currency). Chinese stocks faced pressure following weaker industrial output last month, although recent retail activity showed signs of improvement.

The UK outlook

The Bank of England held interest rates steady last week, as did the Fed. However, the developments in the Middle East add new uncertainty for investors. Rising energy costs tend to push up UK inflation relatively quickly – so policymakers will be closely monitoring oil prices.

The latest data from the Office for National Statistics (ONS) showed the UK inflation rate at 3.4% in May, the same rate as April. Within that, services inflation – previously a persistent pressure point – eased to 4.7%, down from 5.4%. However, inflation in food, non-alcoholic drinks, furniture and household goods edged higher.

Retail sales were weaker, falling 2.7% in May, with food shops being particularly hard hit. According to the ONS:

“The fall was mainly because of reduced sales volumes in supermarkets, with retailer comments talking of inflation and customer cutbacks, alongside reduced sales of alcohol and tobacco products.”

On a similar note, data company GfK found consumer confidence improved slightly in May. But this survey predated the latest geopolitical flare-up, which could affect sentiment moving forward. Confidence also remains significantly lower than during the same period a year ago.

Wealth Check 

Greater volatility, greater opportunities?

An increasingly uncertain world, geopolitical tension and one of the most influential powers led by a president who seems determined to be unpredictable – it’s a recipe for market volatility.

Howard Marks, co-founder and co-chair of one of St. James’s Place’s specialist external fund managers, Oaktree Capital, discusses this unusually high uncertainty and the implications of markets responding to this.

Looking back at tariff turbulence

Despite the recent escalation, the global uncertainty didn’t start in the summer. Market shifts around the US tariff announcements have dominated the headlines (and WeeklyWatch!) over the past five months.

Following the so-called Liberation Day announcements, Marks shared a note with his own investors highlighting the impact of the tariffs, saying:

“All norms have been overthrown. The way world trade has operated for the last 80 years may be of little relevance to the future. The impact on economies and the world at large is entirely unpredictable. We’re faced with large-scale decisions, yet again there are no facts or prior experiences on which to base those decisions.”

Finding value amid uncertainty

Despite this backdrop, Marks remains optimistic about the value bonds have for investors – particularly sub-investment grade corporate bonds. He acknowledges the risk of defaults (companies not paying back their debt) has increased – particularly in an environment of rising interest rates, which make it difficult to repay loans during tough economic times. However, he believes the yields now available compensate for that risk. He said in a recent conversation with St. James’s Place CIO, Justin Onuekwusi:

“If you can get annual returns of around 6–8% a year in today’s market, with the kind of uncertainty we face, that’s great.”

He reminds investors that the core appeal of bonds lies in their predictability – hence the term ‘fixed income’. You know exactly the return you’ll get (yield) if they keep their promise to pay back your money at a specified date. Companies with debt rated as sub-investment grade (i.e. high yield, meaning they are rated as riskier than others regarding defaulting) pay even more as an incentive. And even though the promise of a high-yield company is less ironclad, the returns they offer in exchange for that uncertainty remain attractive.

Perspective and patience

Describing risk tolerance as “how much volatility can you stomach”, Marks says investors should tune out the daily noise that often drives markets. Describing his own investment philosophy, he says he tries to think about what the right thing is today for a future he can’t see.

“Yesterday’s solution may not be the same as tomorrow. My job is to position capital to benefit from future events and yet we can’t predict the future.”

Some of the strongest emotions felt by investors are envy and FOMO (fear of missing out), Marks points out in an interview with St. James’s Place’s Director of Portfolio Management, Robin Ellis:

“How can you be a good investor if you let those feelings control your decision-making? The most important thing is not to get it right but to be steady and stay with it – it’s not about timing the market but time in the market that makes the difference.”

Marks concludes on the point that while investors are looking at returns over shorter and shorter time frames, it’s still the long term that matters most.

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SJP Approved 16/06/2025