The last time Iran and Israel exchanged missiles and bombs—over a year ago—financial markets barely reacted. In his latest Decoder, APG’s Chief Economist Thijs Knaap revisits the conclusions he drew back then and considers whether they still hold true. Since the Decoder was written prior to the U.S. airstrikes on Iranian nuclear facilities last weekend, Knaap provides an update here.
When I wrote the Decoder last week for our pension fund clients, we didn’t yet know how Donald Trump would respond or how Iran might react to a potential U.S. attack. Now that a—fragile—ceasefire has been declared on Tuesday, it seems the situation is de-escalating. Back in April last year, after Israel and Iran directly attacked each other for the first time in a long while, we concluded that financial markets weren’t particularly concerned. Interest rates, stock prices, and oil prices barely moved. This time around, markets again showed little reaction, although oil prices did jump by more than 10%. However, following Tuesday morning’s news of a ceasefire, oil prices quickly dropped back to their pre-strike levels. Clearly, financial markets are confident in a positive resolution.
What we’ve learned over the past few days is that Iran is in a weak position. A few years ago, Tehran would likely have retaliated through its proxies, such as Hezbollah in Lebanon or the Houthis in Yemen. Now, calm seems to have returned quickly, which is good news—especially for us as investors.
Had the conflict escalated, it would have caused not only immense human suffering but also significant economic repercussions, perhaps even comparable to the oil crisis of the 1970s. Back then, disrupted oil supplies triggered a stagflationary shock, falling stock prices, and economic malaise. What should investors do in such a scenario? At times like that, you want to hold real assets—such as businesses, infrastructure, and real estate. That’s exactly what we’ve been focusing on in recent years. At the same time, you don’t want to rely entirely on interest rate hedging, since rates are likely to rise. I conclude that pension funds are well positioned to withstand stagflationary shocks from armed conflict without having to rebalance their portfolios immediately.