A global fund manager has identified some of the most significant impacts the current conflict in the Middle East will have on investment markets, such as the economic consequences and the regions that will be most affected.
Firstly, T Rowe Price capital market strategist Tim Murray noted the skirmish will have negative implications for inflation and in turn the interest rate policy of central banks, and in particular the United States Federal Reserve.
“The key inflation risk from the conflict runs through energy. Oil is arguably the single most important input into global inflation. It feeds directly into fuel and transportation costs, but it also indirectly impacts a wide range of manufactured goods and supply chains. A sustained rise in oil prices would likely push goods inflation higher fairly quickly,” Murray explained.
He pointed out this development could change market expectations of an easing in US monetary policy and the subsequent lowering of its official interest rate.
“If oil prices spike and goods inflation reaccelerates, it could complicate the Federal Reserve’s path. The Fed may need to remain more cautious than markets currently expect, potentially limiting the degree of rate cuts in the second half of 2026. In short, energy is the swing factor for the inflation outlook,” he said.
With regard to specific regions, he pinpointed the equity markets in Asia as the ones to be most concerned about in the existing geopolitical climate.
“The main economic transmission channel from the Middle East conflict is energy. Markets are focused less on direct trade disruption and more on the risk of sustained increases in oil and natural gas prices. That’s particularly important for Asia,” he indicated.
“The US is now a net energy producer, while most Asian economies are significant importers. Higher energy prices can support parts of the US market, especially the energy sector, but they act as a drag on growth, margins, currencies and current accounts across much of Asia. That creates a relative headwind for the region in a risk-off environment.”
Further, he suggested diversification has taken on even more importance for investors right now, especially due to the scarcity of safe havens.
“Safe havens are relatively scarce, which makes diversification even more critical. Real assets, particularly commodities, can play an important role in a prolonged conflict scenario. They tend to act as effective inflation hedges and historically perform well during supply-driven shocks,” he clarified.
“At the same time, maintaining healthy allocations to bonds and cash is prudent in case higher energy prices ultimately tip economies toward slower growth or recession.”