Geopolitical Risk Scenarios Revisited: Stress Testing Investment Strategies Amid the Israel-Iran Conflict

With financial market and economic risks related to the Israel-Iran conflict increasing, we turn back to our previous broader geopolitical risk analysis involving two scenarios: increases in geopolitical tension and fragmentation. The overall approach to stress testing and risk analysis serves as a reminder that FactSet clients may run these on their portfolios and examine the impact on their investments from both real and hypothetical increases in geopolitical risks.

In addition, the following updated analysis also testifies the first day market response is very close to our short-term scenario results, confirming our methodology and approach.

In our original analysis we added a couple of geopolitical risk scenarios with the hypothetical impacts:

Geopolitical Tension Increase – this scenario is more short-term in nature and accounts for conflicts rising in different parts of the world, when they remain relatively isolated, e.g. Gaza conflict from October 2023 and again in April 2024. Usually the effect observed on the financial markets from these pass for a few days. Assumptions in the scenario definition:

• Equity market drops by 1%

• Volatility index spikes by 1.5%

• Corporate spread increases by 3%

• Crude oil price increases by 10%

Geopolitical Fragmentation – this scenario reflects longer-term conflicts, intensifying for months with imposing some division of trade and economic activities along geopolitical borders. For example, restrictions on Russia after the invasion of Ukraine from February - March 2022, Brexit referendum in June 2016 and the possible Greece exit from the EU in May 2012.

This scenario averages these historical periods by the following returns:

• Equity market drops by 7%

• Volatility index spikes by 30%

• Corporate spread increases by 15%

• Crude oil price increases by 10%

Both of these scenarios are available today in the Workstation to run on clients’ investment portfolios within Thematic Scenarios from FactSet Template Stress Test scenarios.

Comparison with returns as of June 13, 2025

Looking back at the events from Friday, June 13, 2025, when Israel launched attacks on Iran, we compare the short-term hypothetical scenario impact from Geopolitical Risk Increase scenario with the actual return from this date.

We run the scenario on a broad global equity index and broad global bond index and then slice the returns across different regions. On the plot below we see how close the scenario returns are under the assumption of increasing geopolitical risk with the actual returns from Friday, June 13, 2025, both on the equity index level and on each region, especially Europe, North America, and Latin America. For Africa/Mideast the actual return was a larger negative than the scenario, but still relatively close in value. 

With focus on the bond market the comparison also shows that the daily returns from June 13, 2025, are very close to the scenario for an increase in geopolitical risk. In this case the scenario return for most regions is a larger negative number than the actual return. However, as credit spreads and yields on the bond markets would generally reflect geopolitical risk increases at a slower pace, we would expect this effect to accumulate in the following days as well. 

Longer term perspective in hypothetical geopolitical fragmentation

We then take a look at the longer-term scenario, which assumes the conflicts persist and pose some trade or physical barriers for economic activity. Note the past Gaza conflicts have not evolved to apply these larger-impact global shocks. However, in the context of increasing geopolitical risk, this remains a relevant and consistent part of the analysis.

We examine the impact from the hypothetical scenario of global geopolitical fragmentation intensifies on different investable indices. Results are presented on the chart below with darker bars for the broad equity and bond index and brighter bars for the different components from these indices. To highlight:

• Equity markets impact is larger compared to bonds. This is expected, as usually uncertainty causes more negative impact on stock markets, as bonds are considered a safer asset type.

• Large cap equities exhibit negligibly lower impact compared to small cap stocks, which are more sensitive to macroeconomic changes.

• We observe negative impact on bond markets as well, which is relatively close among different bond asset types with securitized and corporate bonds showing larger loss compared to government bonds, as any uncertainty on the market would have larger effect on more risky asset types.

Geopolitical scenarios as part of the stress testing module of our FactSet Portfolio Analysis Risk Solution allow tests to be run on any investment portfolio or benchmark, as well as to be elaborated with client-specific assumptions on particular factors or sectors impact.

While based on historical observations from past consistent geopolitical events, these scenarios are simply a base or starting point for analysis of possible impact from increasing risks related to wars, political, and trade fragmentation. 

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This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.