Iran conflict: The macro and market implications

The recent conflict in Iran has had serious human consequences and added new uncertainty to global markets. Our portfolio managers — Dale Nicholls, Sam Morse, Marcel Stötzel, Nick Price and Chris Tennant — share their initial views on what it could mean for investors.

Fidelity China Special Situations PLC

Dale Nicholls, Portfolio Manager

In brief

Recent events in the Middle East are evolving quickly and we recognise the seriousness of the current geopolitical tensions. From a market point of view, the main question is whether the situation stays contained or becomes more prolonged and extended. 

What could affect Chinese shares?

For Chinese equities, the impact is mostly indirect, however we are mindful of the effect on the following channels:

• Energy prices: a sustained rise in oil prices would primarily matter through its impact on energy-intensive industries and potentially weigh on consumer confidence if inflation pressures were to build.
• Global risk sentiment: big headlines can unsettle investors and cause sharper short‑term ups and downs in markets.
• Supply chains: any disruption to the movement of goods can affect companies that rely on global trade.

At this stage, we view these as manageable second-order effects rather than structural shifts. We are monitoring these closely, while recognising that domestic fundamentals remain the primary driver of long-term returns for the trust.

How the trust is positioned

• The trust remains focused on innovation, domestic spending and industrial themes in China — these areas that are less directly exposed to global trade or energy supply disruptions.
• Our exposure to select gold-related investments can help to provide some diversification in periods of geopolitical stress.
• Importantly, the trust’s investment approach remains focused on researching and understanding each company in detail. Periods of heightened uncertainty can create dislocation between share prices and fundamental company valuations. Should volatility increase meaningfully, we would look to assess whether selective opportunities emerge, rather than react tactically to short-term headlines.

Fidelity European Trust PLC

Sam Morse & Marcel Stötzel, Portfolio Managers

In brief

We recognise the seriousness of the current geopolitical tensions and the broader human implications. Geopolitical conflict can create short-term volatility, however, markets often refocus on economic fundamentals over time. Maintaining a diversified portfolio can help manage risk during periods of uncertainty.

The trust’s strategy is built around identifying companies that can grow dividends sustainably through the cycle, supported by strong cash generation and balance sheets. This discipline has historically delivered more consistent returns and better downside protection than the broader market, particularly during periods of stress.

How the trust is positioned

• The portfolio remains balanced across different sectors, and our approach continues to be grounded in detailed, company research. Our positioning is driven by opportunities at the individual stock level rather than by macro developments.
• Rather than attempting to anticipate short-term geopolitical developments, investors are typically better served by remaining disciplined, diversified and focused on long-term objectives.
• As such, focusing on long-term fundamentals and disciplined risk management, remains central to how we seek to navigate uncertain environments on behalf of our clients.

Fidelity Emerging Markets Limited

Nick Price & Chris Tennant, Portfolio Managers

In brief

• While news reports regarding developments in the Middle East are concerning, it is important to note that Iran has been a source of destabilisation in the Global Gulf Cooperation (GCC - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) for many years. This explains why investors have applied a geopolitical discount for these equity markets ever since they have been open to foreign investors.
• A weakened Iran could reduce this valuation discount and therefore it could be seen as a long-term positive for the GCC region’s economic and equity market outlook.
• In the short term there could be elevated volatility in share prices, but here we expect both the level of volatility and the duration of this period to be shorter than what emerging market investors tend to experience elsewhere. The sovereign balance sheets of the GCC countries are among the strongest in the world and both the UAE and Saudi Arabia have an established a track record of supporting the equity markets at times of intense selling pressure.

Impact on oil prices

• News reports highlight significant disruption to the oil tanker traffic via the Strait of Hormuz that could drive a spike in the oil price. Here we would point out the following:
  • Iran has indicated intentions to close the strait over recent years. For this reason, Aramco has invested heavily in its East–West oil pipeline, which can move large volumes of oil without using this route. Historically, spikes in energy prices often don’t last long, and prices have tended to fall back within a few quarters — as we also saw in 2022.

Potential scenarios

• Overall, the situation in Iran is worrying, though not entirely surprising given ongoing tensions in the region. For markets, the key question is how long it lasts. If the conflict is short‑lived and contained, past experience suggests the impact on global markets — including emerging markets — is likely to be limited. In that case, volatility may create short‑term price swings and, potentially, selective buying opportunities.
• If the situation continues for longer, the effect on emerging markets could become more significant. Ongoing disruption to oil production or supply would likely keep energy prices higher, which could add to inflation around the world. This would be felt most in countries where incomes are lower and energy costs make up a bigger share of household spending. A prolonged period of uncertainty could also lead investors to rethink how much risk they’re taking on, including in popular areas of the market such as AI and technology hardware.

How the trust is positioned

• Whilst our working assumption is the conflict will likely be short-lived, there clearly remains a high degree of uncertainty, and this is not a given.
• While we are not making any changes at this point, we are closely monitoring developments and assessing both the macro backdrop and company-specific implications. Our focus remains firmly on fundamentals and valuations, and we would seek to use any short-term volatility constructively should attractive opportunities emerge.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments are subject to currency fluctuations. Investments in emerging markets can be more volatile than other more developed markets. The Fidelity European Trust PLC, Fidelity China Special Situations PLC and Fidelity Emerging Markets Limited use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The shares in the investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser. Investors should note that the views expressed may no longer be current and may have already been acted upon.

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