On 12 June 2025, a significant escalation in Middle East tensions occurred when Israel launched a large-scale pre-emptive strike against Iran. The ripple effects of this military operation are already being felt across global financial markets, with increased volatility, commodity price fluctuations, and renewed concerns around geopolitical risk. In this article, we examine the potential investment implications of this conflict and the rationale behind maintaining a defensive portfolio stance in response.
Israel’s military operation, named “Rising Lion”, targeted Iranian nuclear facilities, missile installations, and key military infrastructure. The strike was reportedly prompted by intelligence suggesting Iran was nearing nuclear weapons capability. Explosions were reported across Tehran, killing several senior Iranian officials, including IRGC commander Hossein Salami.
In retaliation, Iranian Supreme Leader Ali Khamenei has vowed “harsh punishment” against Israel. Both countries have declared states of emergency and closed their airspace. Meanwhile, the United States has begun evacuating diplomatic staff from Iraq, Bahrain, and Kuwait due to rising regional instability. The International Atomic Energy Agency (IAEA) has also formally censured Iran for breaching nuclear enrichment thresholds, further fuelling international tension.
The Australian share market turned lower, and U.S. equity futures weakened as investors sought refuge in traditional safe-haven assets such as U.S. Treasuries. Oil prices surged on fears of supply disruption, a common market response to instability in the Middle East.
This escalation is expected to sustain market volatility in the short term and may apply downward pressure on equity markets, which are currently elevated and priced for perfection.
According to Marko Papic, Chief Strategist at BCA Research, the market response will hinge on Iran’s next move. If Iran targets U.S. assets in the region, an immediate and severe U.S. response is likely.
“The only certainty at this point is upward pressure on crude,” Papic notes, “though the spike would likely be temporary and not alter central bank policy outlook.”
He adds, “Investors should expect a cycle of retaliation and re-retaliation, as in 2024, but should fade effects on both crude and global risk assets if this becomes the bulk of the Iranian retaliation.”
In light of the current political risks and broader global trade tensions, our investment team continues to favour a defensive stance. We maintain an overweight allocation to fixed interest and an underweight position in equities.
The Findex investment team and Investment Committee are closely monitoring these macroeconomic developments to ensure client investment portfolios remain appropriately positioned for the changing risk environment.
While the geopolitical landscape remains fluid, disciplined risk management and diversification are key. Investors should avoid making reactive decisions based on headlines and instead focus on long-term strategy aligned with their goals and risk tolerance.
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