As the war in Iran continues, risk managers are turning their attention to potential scenarios and impacts on investment portfolios. If history serves as a guide, the portfolio implications depend both on the duration of the conflict and how long stress factors persist.
To support risk managers in their portfolio analyses, we provide FactSet clients with access to two predefined hypothetical scenarios based on historical Middle East conflicts:
The main risk of the current conflict involves potential disruption to crude oil and LNG supplies, particularly if key maritime chokepoints such as the Strait of Hormuz and Bab el-Mandeb are affected. Even the expectation of such events occurring can drive crude oil and LNG prices higher, contributing to increased inflation expectations globally. Major importers, including India, China, South Korea, and Japan, are assumed to be most exposed.
Additionally, disruptions to trade routes in the Red Sea or through the Suez Canal could intensify the impact, resulting in further economic pressures for European countries. Given the shock originates in the Middle East, countries in the region are expected to experience significant halts in business and travel activities. The shock could propagate to countries with strong economic ties to the Middle East. According to FactSet’s GeoRev data, major European equity indices are particularly exposed.
Traditional safe havens, such as gold, often see increased demand during periods of military conflict and rising inflation expectations. Similarly, a shift toward high-rated government bonds—a so-called flight to quality—may occur, though this tendency can be tempered if inflation concerns intensify.
This scenario replicates the shocks following Iraq’s invasion of Kuwait in 1990, focusing on the period between August 1, 1990, and August 23,1990. The key factors and their shocks were:
Crude Oil (WTI): +45.28%
Gold: +13.59%
US Treasury Bond 10yr Yield: +0.71 bps
US Treasury Bill 3m Yield: +0.12 bps
S&P 500 Index: -13.63%
France CAC40 Index: -21.00%
Japan Nikkei 225 Index: -23.00
US Dollar Index: -2.64%
This scenario can be used to stress test portfolios in the event that the current conflict, along with the aforementioned shocks, persists for several weeks. By modeling the potential impact of sustained disruptions and price movements, investors can better prepare for prolonged volatility and heightened risks across asset classes.
This scenario focuses on the period from March 12, 2003, to March 21, 2003, during the US-led invasion of Iraq:
Crude Oil (WTI): -28.87%
US Treasury Bond 10yr Yield: +0.51 bps
US Treasury Bill 3m Yield: +0.08 bps
S&P 500 Index: +11.39%
Euro STOXX Index: +18.37%
Hang Seng Index: +4.65%
US Dollar Index: +4.10%
The 2003 episode demonstrated that the composition of shocks can reverse, with equity indices rising and crude oil prices falling. Notably, in the months preceding the conflict, based on expectations of war in the Middle East, markets behaved similarly to the 1990 scenario. However, once the war became inevitable but with expectations of a quick completion—with OPEC assuring increased output to alleviate shortages—markets began to discount the risks. That led to declines in crude oil prices and rallies in global equities.
This scenario can provide insight into potential market reactions if the current conflict is resolved.
In both cases, the primary determinants of market behavior are the duration of the conflict and the impact on oil.
While prior episodes may not precisely predict the portfolio impacts of the current conflict, stress testing portfolios to withstand such shocks remains prudent. Both predefined scenarios in the FactSet Workstation provide clients with a baseline for building in their own factor assumptions.
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