Geopolitical Risk Scenarios: Stress Testing Investment Strategies Amid the War in Iran

With geopolitical risk increasing as a result of the war in Iran, we revisit our previous geopolitical risk analysis involving two broader scenarios: increases in geopolitical tension and fragmentation. FactSet clients may run this approach on their own portfolios to examine the impact on their investments from both real and hypothetical increases in geopolitical risks.

In addition, the following analysis as of March 2, 2026, confirms the market response on the first day is very close to our short-term scenario results, confirming our methodology and approach.

For the analysis, we use two geopolitical risk scenarios with hypothetical impacts.

Scenario No. 1: Geopolitical Tension Increase

This scenario is short-term in nature and accounts for conflicts that remain relatively isolated, e.g. Gaza conflict from October 2023 and again in April 2024. Usually, the financial market effects pass in a few days. Assumptions in the scenario definition:

• Equity market drops 1%

• Volatility index spikes 1.5%

• Corporate spread increases 3%

• Crude oil price increases 10%

Scenario No. 2: Geopolitical Fragmentation

This scenario reflects longer-term conflicts, intensifying for months and 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, the Brexit referendum in June 2016, and the then-potential exit of Greece from the EU in May 2012.

Scenario No. 2 averages those historical periods with the following returns:

• Equity market drops 7%

• Volatility index spikes 30%

• Corporate spread increases 15%

• Crude oil price increases 10%

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

Short-Term Perspective in Geopolitical Tension Increase Scenario Analysis

Running the scenario on a broad global equity index and broad global bond index and then slicing the returns across different regions, we see the short-term impact is relatively small overall with around 1% loss on the global index level.

• Larger negative returns prevail in Japan due to their higher dependence on energy sources, as they import around 90% of their oil from the Middle East.

• Europe is also not sufficiently diversified and has lower gas reserves; therefore impact is more visible.

• Emerging market economies are generally more impacted by geopolitical shocks and realize negative returns of -1.5%.

On the plot below we see the comparison of the forecasted returns on different equity regions and the actual one-day return of the regions as of March 2, 2026, where markets are closed. The two series are very close as we compare a daily return to the scenario forecast, which assumes a few days of impact to account for the short-term response to increasing geopolitical tension.

When scenario No. 1 (Geopolitical Tension Increase) is applied on a global aggregate bond index, we see the response of the bond market is smaller compared to equities, which is expected given they are considered a safer asset type during crisis. We observe very similar small negative returns across different regions, with negligibly smaller impact in Europe and Asia.

Longer-Term Perspective in Hypothetical Geopolitical Fragmentation

We then take a look at the longer-term scenario, which assumes conflicts persist and pose some trade or physical barriers for economic activity. Note the past Middle East conflicts did not evolve 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 intensified global geopolitical fragmentation on different investable indices. Results are presented on the charts below.

To highlight:

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

• For equity markets, the countries with large dependencies on energy imports are most impacted as the fragmentation sharpens the oil supply shock. Emerging market countries, where economies are more vulnerable to geopolitical shocks, also suffer larger negative returns under the geopolitical fragmentation.

• We also observe negative impact on bond markets, which are relatively close among different bond asset types, and see the largest impact on Africa given its bond markets are highly dependent on political stability. The debt market in Asia is the least impacted in the intensified geopolitical fragmentation scenario, as that region generally has a lower correlation to other debt markets as well as to higher debt sustainability.

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 sector impacts.

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.

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.