‘Not the time to buy the dip’: Middle East chaos, energy shock spook investors

Market strategists are warning an extended war in Iran will ruin returns for share market investors by stoking energy prices and inflation.

Since the war in Iran spiralled into a regional Middle Eastern conflict the S&P/ASX 200 Index fell 6 per cent from 9198 points to 8639 points on Friday. Investors are concerned Iran could force the closure of key shipping passage the Strait of Hormuz for much longer than expected.

“So, I don’t think it’s the time to buy the dip,” said Matt Sherwood, the Head of Investment Strategy at Perpetual. “I’d keep (spare money) in cash and look to deploy at the right time, when it looks like the Strait of Hormuz will open up, or one side backs down.”

A surge in the benchmark Brent crude oil to more than $US100 a barrel on Friday has led traders to bet heavily on the Reserve Bank raising interest rates in March and May to fight inflation.

Mr Sherwood said benchmark oil prices could reach a punishing $US120 a barrel if the Strait of Hormuz remains closed for weeks, or longer.

“At the moment it’s very difficult to see how the Strait can be opened,” he said. “You need the naval escorts, you need the insurance, crews, and ships. AI doesn’t crew ships and that to me is the biggest challenge.

“And our view was that if one tanker gets hit, they’ll be contagion throughout risk markets and that was right and likely remains right. So the energy price is being weaponised by Iran to try to get the US to back down.”

Worries that higher interest rates will slow economic growth as consumers spend less have sparked a search for alternative investments to shares, which traditionally perform better where interest rates are low.

“The problem is some of the traditional diversifiers in portfolios haven’t worked since the war,” said Mr Sherwood. “Gold and bonds have fallen, so it’s really just cash right now as an option.”

Economic damage bill underestimated

Analysts expect between 15 million and 20 million barrels of the world’s daily fuel supply has been cut off by the Strait of Hormuz’s closure, compared with previous daily global consumption of 100 million barrels.

The energy shock, equal to 15 to 20 per cent of global supply, is triple the 1979 oil shock that removed 5 per cent from the market and tripled oil prices to their final peak 47 years ago.

If oil prices were to follow a similar short-term trajectory they could go from their $US60 level before the war to $US180, said AMP chief economist Shane Oliver.

ANZ Bank warned clients on Friday that share market investors are perhaps underestimating the economic damage bill to come from President Donald Trump’s decision to launch Operation Epic Fury.

“The conflict has now moved beyond a short-lived geopolitical shock and into a phase where supply losses are increasingly structural rather than transient,” said ANZ Bank’s economics team. “To date, we think markets are under-pricing the likely duration of the disruption and the risk of compounding supply losses.”

Nerves across the region are being frayed by news reports that China told oil refiners to halt exports to customers across the Asia Pacific, a decision that raises the risk of shortages.

Price rise shock

Elsewhere since the start of the conflict, diesel and gas price rises have heavily outpaced the jump in crude oil. London Gas Oil, the benchmark for diesel, has jumped 85 per cent from $US607 per metric tonne before the start of the conflict to $US1126 on Friday.

Prices for liquefied natural gas (LNG) in Asia have doubled since the conflict began, according to Bloomberg. Global LNG supplies are expected to face medium-term shortages due in part to an Iranian drone strike shuttering production at Qatar’s Ras Laffan export hub.

Prices for fertiliser ingredients used in farming have also jumped as urea and ammonia supplies are also blocked from transiting the waterway bordered by Iran and Oman.

The shock has already hit Australians in the pocket as petrol, diesel and airfares all leap in price.

Investment rules rewritten in 2026

The war has already rewritten the investment playbook in 2026 with the total damage from its unfolding consequences still uncertain, according to Mr Sherwood.

“At the start of the year people expected the US dollar to fall, gold to rise, and oil to fall. But that market narrative has really been flipped on its head,” he said. “Now there’s real uncertainty primarily driven by the rising oil price in terms of three factors. Its impact on growth, inflation, and the impact of (US) rate cuts the market had priced that’s now being removed.”

The chaos has hit share markets across Asia reliant on gas imports. On Monday, Japan’s Nikkei 225 stock market dived nearly 8 per cent, with South Korea’s Kospi lost 12 per cent over two days.

As UBS analyst Richard Schellbach pointed out this week there were 15 major geopolitical shocks since 1973 and Australian shares always recovered soon afterwards, apart from the 1990 Gulf War. The degree of pain will primarily depend on how long the Strait of Hormuz is closed, he said.

Tough it out

Most investment strategists recommend that amateur investors tough out regular market drops related to war or pandemics, rather than sell in anticipation of further falls.

Andrew Dale, a partner at fund manager ECP Asset Management, said reacting to geopolitical shocks, wars, scary headlines and volatile indices can harm long-term returns.

“There’s no crystal-ball for investors to show the implications of this conflict over the long term,” he said. “Timing the market is always the biggest challenge. Most people can identify high-quality stocks, but it’s hard to time buying them, so don’t panic and stick to a basket of stocks that are good quality and tend to be growing.”

He thinks any big falls in the values of blue-chip businesses like the Commonwealth Bank or Rio Tinto will prove a buying opportunity.

“Banks tend to be a relatively good safe-haven for investors. This is especially true for the Australian market, where we are experiencing sticky inflation and a rate hiking trajectory, but sure, when the economy’s strong there are better places to make money.”