US-Iran tensions shake markets. What investors should buy and avoid now
Defensive sectors and bonds may draw inflows while oil keeps markets volatile
Dubai: Investors facing renewed US-Iran tensions should avoid chasing sudden market moves and focus on diversification, liquidity, and defensive sectors that tend to hold up better during periods of geopolitical stress, analysts advised.
Markets have moved through another bout of uncertainty after the US concluded a second day of strikes on Iran, with oil prices, the dollar, Treasury yields and energy stocks all in focus. Stocks recovered from a brief risk-off spell as crude gains eased, but investors remain alert to the risk that any fresh escalation could push oil higher, revive inflation concerns and increase the chance of higher US interest rates.
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The immediate market response has been mixed. S&P 500 futures rose 0.2%, Brent crude fell 0.5% to $77.60 a barrel after its biggest advance since May, while global bonds recovered modestly after two days of oil-driven selling. The calmer tone has not removed the wider concern that headline-driven trading could keep investors exposed to sudden price swings.
“Periods of heightened geopolitical uncertainty can be difficult to navigate as markets react more to headlines. Under these conditions portfolios that are diversified across asset classes, sectors, and regions can help create resilience," explained Louis Guy Detata, Founder of UEXO.com. "Maintaining exposure to high-quality companies with strong balance sheets, consistent cash flows, and pricing power can help cushion downside risk."
Some industries are highly sensitive to geopolitical developments and shifts in investor sentiment. Airlines, tourism, hospitality, and transportation can experience significant pressure if travel demand weakens or supply chains are disrupted. The energy sector may remain highly volatile, with oil prices reacting sharply to developments in the Middle East, creating both opportunities and risks.
This approach becomes more important when oil and interest-rate expectations move together. Higher energy prices can feed inflation, which can force investors to reconsider the Federal Reserve’s path and put pressure on rate-sensitive sectors.
Minutes from the Fed’s June meeting showed that some officials saw a case for a rate increase, even though the committee held rates steady. Traders are now watching next week’s US inflation data and Kevin Warsh’s testimony to lawmakers for a clearer signal on the direction of interest rates.
Defensive sectors may draw flows
Healthcare, utilities, consumer staples and telecommunications are likely to attract more attention if the conflict worsens, because demand for their services tends to be steadier during periods of stress.
Detata said defensive sectors usually perform better during uncertain periods because earnings are more visible and cash flows are more resilient.
“Defensive sectors typically outperform during periods of uncertainty because demand for their products and services remains relatively stable regardless of economic conditions. Healthcare, utilities, and consumer staples tend to provide greater earnings visibility and more resilient cash flows. Companies with recurring revenues and low leverage can offer a degree of stability. In the current environment, infrastructure and telecommunications businesses could also prove relatively resilient due to the essential nature of their services.”
“The collapse of the US-Iran ceasefire could fuel volatility across various markets and could weigh on the performance of many sectors sensitive to global risk sentiment," Daniel Takieddine, Co-founder and CEO of Sky Links Capital Group, said in a written note. "Additionally, any significant increase in the price of oil could reinforce inflation expectations and drive Fed rate-hike risk.”
He said healthcare, consumer staples, utilities and telecommunications could see more inflows if conditions worsen, while short-term and floating-rate bonds may become more appealing if investors move toward expectations of higher rates.
The technology sector could see correction risks as well after its strong gains if risk aversion increases and investors rotate toward more defensive sectors and assets. Healthcare, consumer staples, utilities and telecommunications could see more inflows if conditions worsen, while short-term and floating rate bonds could become more appealing if expectations continue to move toward higher interest rates.
Sectors exposed to pressure
Airlines, tourism, hospitality, transportation, shipping and parts of technology could face greater uncertainty if travel demand weakens, supply chains are disrupted or investors rotate away from high-growth stocks.
Detata noted that the aviation, tourism, hospitality, and transportation sectors can face significant pressure during geopolitical disruptions. The energy sector could also remain volatile, with oil prices reacting quickly to developments in the Middle East and creating both opportunity and risk.
Takieddine said real estate may also face risks if interest rates increase and investors become more cautious. Shipping companies could face added hurdles if there are new risks around the Strait of Hormuz, while the technology sector could be vulnerable to correction after strong gains if risk aversion rises.
Monte Safieddine, Head of Research at Capital.com MENA, said the first reaction to escalation in an oil-rich region is usually a rise in oil prices, some dollar strength, higher Treasury yields and stronger energy stocks, while most other sectors tend to struggle.
“Initial market reaction to any geopolitical escalation in an oil-rich region is for oil prices to rise, the dollar to advance somewhat on the FX front, Treasury yields to edge higher, and for energy stocks to outperform in the stock market, while most others tend to struggle. But any gains risk being undone swiftly in a headline-driven environment if a positive update provides some relief.”
That means even sectors that benefit from higher oil prices can remain difficult to trade, particularly when one diplomatic update or military development can reverse market direction.
Defensive stock market sectors in the U.S. like utilities might experience lower volatility, but they aren't guaranteed to outperform if rising yields hurt their valuations, as is the case for any bond proxies. Energy-related stocks will naturally suffer more volatility but some investors are embracing them because upside price action puts them at or near the top as witnessed recently.
Do not chase the trade
The general consensus from analysts is that investors should avoid emotional trades during fast-moving geopolitical periods.
Energy-linked stocks may attract buyers because higher oil prices can lift earnings expectations, but the same stocks can suffer if crude retreats on positive diplomatic signals. Utilities may offer lower volatility, but higher yields can still hurt valuations because they are often treated like bond proxies.
Safieddine said technology also remains exposed if yields move higher, especially after strong recent gains and elevated valuations. Chipmakers helped lift markets on Wednesday, but growth stocks may face pressure if higher oil prices keep inflation sticky and raise the risk of further Fed tightening.
“It's important not to chase any moves under a volatile scenario, rather position for where you expect markets to eventually settle in the longer term.”
What could perform better
Commodities, short-term bonds and floating-rate bonds are likely to stay in focus if the market continues to price in inflation risk and higher interest rates.
Detata said oil may remain highly sensitive to geopolitical developments, offering upside if tensions escalate significantly, but also carrying considerable volatility. Longer-term investors may still look at themes with structural support, provided they can withstand near-term turbulence.
The current market backdrop points to a more selective investment approach. Defensive sectors can offer stability, short-duration fixed income can help manage rate risk, and cash can give investors room to act during selloffs, but analysts warned that the priority should be resilience over quick returns while the US-Iran conflict remains unsettled.
- With inputs from Bloomberg.
