The outbreak of war in the Middle East has had a clear impact on financial markets over the last couple of months. At the headline level, stock markets declined initially before recovering and in some cases (like the US), moving to new all-time highs as hopes of an imminent end to hostiltiies rose.
Looking more closely, our specialised equity analysts have provided a sector-by-sector breakdown of the impact from the conflict. For there is far more going on under the bonnet that may not be readily apparent at the headline, benchmark level. The situation remains dynamic in the extreme and can change in no time at all, but we believe the best way to navigate the challenging environment is to monitor the situation closely and, as and when risks and opportunities present themselves, look to respond accordingly.
Maurizio Carulli
Energy Sector:
The energy sector is obviously the most affected by the Strait of Hormuz closure, and in a positive way. Higher oil prices feed into more robust cash flows and earnings, all other things equal, and this gets reflected in rising share price performance of most stocks across the energy spectrum.
The conflict is lasting longer than many people had expected, and this is having an important effect on energy prices. Unfortunately, it will also start to have some negative impact on both economic growth and on inflation.
Clearly, oil and gas prices have been experiencing significant increases since the end of February, when the conflict in the Middle East and the closure of the Strait of Hormuz started. It is important to remind investors that about 20% of world oil and gas production pass through the Strait of Hormuz. Whilst a big chunk of the Saudi Arabia oil production has been redirected from the Persian Gulf to the Red Sea, the International Energy Agency (IEA) estimate, in its latest April update, the loss of oil supply from the Middle East at about 13 million barrels per day of oil, which represents more than 12% of world oil supply. To put things into context, 12% of oil supply is a much bigger supply shock than in previous energy crises, like the Yom Kippur war in 1973, the Iran-Iraq war in the eighties, the invasion of Kuwait in the early nineties, and, more recently, the Ukrainian war.
Normally, OPEC would have significant capability to counterbalance oil price spikes, just increasing oil production. The problem is that the OPEC members which have spare capacity to raise oil production, like Saudia Arabia and the UAE, use the Strait of Hormuz for a large portion of their exports. So, until it is safe for oil tankers to navigate those waters again, Opec influence is severely impaired. On the other side, the US influence on energy markets has increased substantially.
There are three points that is important to consider when evaluating the current energy crisis.
- The oil and gas price reaction could become “non-linear” if available oil strategic and commercial reserves will progressively run out and physical disruption progressively starts to occur, in the case that Hormuz is not reopened. So far, we have not really experienced that, thanks to previous existing inventories and strategic reserves releases. The G7 decision to release about 400 million barrels of Strategic Petroleum Reserves (i.e. the equivalent of 20-25 days’ worth of oil transported through the Strait of Hormuz) has been certainly positive but it only partially ameliorates the current pressure on oil prices and it has only a rather temporary effect. The longer the Strait of Hormuz remains closed, the more likely physical disruption might happen.
- When oil price rises significantly, “oil demand destruction” can occur. This is because despite oil demand being very inelastic, (i.e. does not change much when price increases) when oil price is very high, buyers can start to reduce orders and/or try to replace oil with other forms of energy (like coal or renewables) when possible. So far, the energy market has not experienced “oil demand destruction”, but this is a possibility if oil prices will increase further from current levels. Most energy economists believe that “oil demand destruction” can happen at an oil price level of $140/bbl or more. In short, so far, we have experienced “oil supply destruction” and heavy oil reserves usage, not “oil demand destruction”.
- High oil prices can affect economic indicators too, and in particular, GDP growth and inflation. As a gross rule of thumb, a $10/bbl change in oil price, sustained over time, could determine a 30-40bps increase in consumer inflation indexes for developed countries. It could also shave off 10-30bps from GDP growth. So, the higher the oil price increase the heavier the effects on macroeconomic indicators.
It is worth noting that equity markets tend to be more correlated with the earnings growth of the listed companies constituent of the stock market indexes than by economic growth indicators only. And this might explain why equity markets have been, so far, more resilient to the current energy crisis than one might have expected.
Elevated oil prices are a bit like the tide: tend to lift all boats in the energy sector.
Beneficiaries among Integrated Oil Companies are BP and Shell in the UK, TotalEnergies and ENI in Europe ex UK, Chevron and ExxonMobil in the US.
Beneficiaries are also the pure E&Ps without significant presence in the Middle East, particularly the US ones, like EOG or ConocoPhillips and the few Continental European ones like Equinor, Var Energy, AkerBP.
Oil services companies like SLB, Baker Hughes, Halliburton, while experiencing some short-term headwinds due to the suspended / decreased business from the Middle East, are likely to benefit from the reconstruction of damaged hydrocarbon infrastructure there, as well as from extra demand from the rest of the world.
Finally, Refiners, like Valero in the US, while normally would be negatively affected by the higher cost oil feedstock, in the current situation, given the lack of refined products caused by the Strait of Hormuz closure, are actually benefitting by higher refining margins.
As a rather gross rule of thumb, one can assume that a $10/bbl change in oil price, sustained over time, causes an increase in cash flow from operation of an integrated energy company of about 5-10%, and of an E&P company of about 10-15%. Currently, oil price is more than $30/bbl above the pre-war level.
Of course, for companies that have producing assets in the Gulf, the positive impact is a bit lessened by the potentially decreased export capacity from the region. ExxonMobil has about 20% of its oil and gas production in the region, TotalEnergies has 19%, Shell 13%, BP 8%, Chevron 4%, ConocoPhillips 3%.
Lastly, renewable energy, after a strong battering in recent years, may catch again the attention of governments as an effective source of energy security and energy independence.
Materials:
About a third of the world supply of fertilisers (nitrogen, ammonia, etc.) transits through the Strait of Hormuz, and this has reduced supply. Chemical companies focused on fertilisers with no production in the Middle East, like CF, Mosaic, Nutrien in North America or Yara in Europe, are benefitting from it. A secondary effect will be on crop yields after the summer, with negative effects on food prices and food inflation.
On Miners, the potential concern is on the impact of the Iranian war on GDP growth, China metals demand and higher energy input costs going forward. But the positive long-term fundamentals and supply constraints for copper and other commodities are still there, and this should protect companies like Anglo American. Glencore, given its exposure to thermal coal, should benefit too.
For Cement and Steel companies, like Heidelberg or Arcelor Mittal, higher energy costs negatively affect profitability, but again, only if sustained for a long period of time. Other positively offsetting factors, like increased infrastructure demand, protectionist measures, carbon emissions legislation, demand for hard assets as an inflation protection, etc., are at play too.
Matthew Dorset
Transport:
For shipping and freight, the closure of the Strait of Hormuz will impact freight traffic, but not overly significantly as only ~3% of container trade (pre-conflict) passed through the Strait of Hormuz. The Red Sea is far more important for container traffic. Transits through Suez had started to pick up, but clearly any restoration of this route will now be postponed for some time.
Costs have increased across the board for shipping, with ocean freight rates up ~40%, fuel costs for shipping are up ~50%, and increased insurance costs. Shipping companies, and certainly freight forwarders like DSV, can typically pass these costs onto consumers. However, there is some risk of volume headwinds, especially if economic growth suffers from sustained high oil prices.
For airlines, there has been severe disruption in flights in the Middle East which clearly negatively impacts airlines operating in the region. However, the broader risk is that of sustained high jet fuel prices and jet fuel shortages. Jet fuel prices have more than doubled since the beginning of the conflict with a significant increase in the relative price between oil and jet fuel, severely pressuring airline profitability. Airlines would need to increase air fares by ~30% to offset this, and already some are cutting capacity, with Lufthansa announcing recently that 20k short haul flights will be cut. We would note that European airlines tend to hedge fuel costs so are partially insulated unlike their US peers, and would expect low-cost carriers to suffer more as they will be less able to pass costs onto consumers. While these headwinds are partially embedded into share prices, expectations are typically based on current forward curve assumptions for oil and jet fuel prices. If jet fuel prices increase higher than expected or persist for longer than expected this would be incrementally negative for airlines. In addition, any negative impact on economic growth will exacerbate impacts on airlines as demand for flights would likely weaken.
Aerospace & Defence:
The higher and longer jet fuel prices remain, the higher the risk of an aftermarket downturn for aerospace companies, driven by reduced flight traffic and aircraft parking/retirement by airlines. Aircraft engine makers and suppliers profit as their engine fleets fly, and generate high margin revenue from spare parts and servicing. With airlines likely to increase fares and already cutting capacity, flight traffic will fall and airlines will park/retire less efficient aircraft, and any demand destruction from a macroeconomic shock will exacerbate this. In addition, given the hit to their profitability, airlines will likely defer discretionary maintenance work and run down stock of spare parts to preserve cash.
GE Aerospace have already lowered their expectations for flight departures in 2026, they now expect flat or low single digit growth vs mid-single digit growth previously, but highlighted a 9-12 month lag before this will flow through to aftermarket profits. Indeed, GE Aerospace made comparison to the 2008 financial crisis, which points to the potential for significant downside if the situation does not improve.
In a negative scenario, we would expect companies heavily geared to the aftermarket to suffer most, including the likes of GE Aerospace, Rolls Royce, Safran, and Melrose. Aircraft manufacturers Airbus and Boeing should be more insulated given significant order backlogs and new aircraft will be increasingly attractive given improved fuel efficiency, albeit in extreme scenarios weak airline profitability could lead to order cancellations.
Defence companies should also be more insulated, although there may be some complication to supply chains and they may suffer from any aerospace exposure. In fact, we would view the increasing normalisation of the use of force for political ends as generally supportive for defence stocks. Companies with exposure to missiles and air defence systems, such as RTX, Lockheed Martin, and BAE, will also benefit from increased consumption of missile stocks, with Trump calling for a 4x increase in production of “exquisite class” weaponry. For example, at Q1 results RTX slightly increased their FY guidance as a result of strong demand for missiles and missile defence.
Mamta Valechha
Consumer Discretionary:
The Middle East accounts for ~5% of group sales on average for the Consumer Discretionary sector, so the direct impact may be limited, but the indirect effects from the conflict are in many ways more significant and can be split between consumer effects and costs of goods.
The sector remains inversely correlated with the oil price, therefore continued elevated oil prices will cause margin pressures from rising raw material costs, along with supply chain disruptions, as companies may not be able to fully pass on these costs to consumers. Higher energy and fuel prices are also set to weigh on household disposable income, dampening consumer demand for discretionary products.
Sea freight costs are typically 2-4% of cost of sales, and these have risen by c.20% (and c.25% for air freight) because of the Middle East conflict. However, these have tailed off in recent days and are far below the spikes seen in 2021 2022. The higher oil prices have also fed into c.40% inflation in polyester, and cotton is c.10% higher year-on-year. While this inflation is also less severe than in 2021/2022, both are key raw materials for apparel companies, and even more so for sportswear brands. Whilst it is difficult to predict the impact of these cost increases, brands will seek to mitigate this via different material selection and price increases.
We’ve had some of the grandees of luxury, including LVMH, Kering and Hermes, reporting recently, and unsurprisingly, the adverse impact from the Middle East conflict was a key focus. The Middle East makes up about 4-6% of group revenue for these luxury companies, and it is quite a profitable region given higher price points and greater tourism, particularly in the UAE. We not only saw demand being hit in countries within the Middle East, but also in Europe where around 50% of demand is tourism led, and Japan too. So, whilst the direct impact may seem minimal at first, the second-order impact from tourism is not insignificant, with the disruption in March having a 1-1.5% impact on group revenue.
Most big European hotel groups have some exposure to the Middle East, with Accor the most exposed with ~9% of rooms in that region, followed by IHG (5% of rooms). For the US hotel groups, the Middle East remains a relatively small (2-4%) share of their overall room number (Marriott 3.8%). With tourism being hit and travel getting more expensive, the question remains how much of that can be offset by staycations or travel moving elsewhere.
Restaurants remain in a challenging operating environment; we see the abrupt rise in gasoline prices likely adding pressure to discretionary restaurant spend and further driving trade-down to eating at home.
Chris Beckett
Consumer Staples:
Consumer staples stocks are discounting a relatively benign outcome for the conflict in the Middle East. Under such a scenario, which remains our central case the economic impact will be fairly limited.
However, at the margin, higher oil prices will reduce economic growth and consumer expenditure. We would expect generally higher energy costs to feed through the supply chain, creating cost and pricing pressures. As direct energy costs are typically only 2% of product costs, the direct impact will be fairly limited. For example, while P&G is not yet giving full guidance for 2027, it did note that oil at US$100 would create a US$1bn after tax cost headwind. To put this in context, $1bn is 2.25% of cost of goods for the year or 4.75% of operating income - a significant number but not catastrophic. Management intend to present cost mitigation plans with their full-year results in July. Second round cost pressures, particularly via plastic packaging – important for the household goods sector - will create particular challenges. Fertiliser costs will increase agricultural production costs and reduce supply - however, the raw ingredient costs of most packaged foods are relatively low. Cocoa and coffee prices are very important for several large companies (Nestle, Mondelez) but these have structural price drivers that are far more important than fertiliser and energy. Better categories and brands, for example, British American Tobacco and Coca Cola will be able to pass this on to consumers – at the cost of higher inflation – but in more commoditised areas margins will come under pressure (for example, Pepsi, the owner of Quaker oats). Oil prices would have to stay higher for longer than our base case to cause demand destruction both in energy itself and in more energy intensive consumer products. More extreme scenarios for the Middle East (renewed war, higher energy prices, significantly lower GDP) are actually positive for consumer staples in terms of relative performance – these are generally essential products where demand is less economically sensitive – but is very much a tail risk.
Lucy Rumbold
Food Retail:
So far, the Middle East conflict has not meaningfully flowed through to food retail. Grocers such as Tesco and Sainsbury’s on last week’s earnings calls report little evidence of a shift in consumer behaviour. The main watchpoint is a renewed inflation impulse via energy, freight and fertiliser, but its scale will depend on the duration and intensity of the conflict; at this stage, we see a repeat of the 2022 inflation surge as unlikely. Sainsbury’s has also indicated it expects price increases to start feeding through from June. In terms of profitability, Europe appears more exposed than the US, and while consensus earnings expectations have not moved materially, Tesco and Sainsbury’s have prudently lowered the bottom end of guidance. The US should remain comparatively insulated, and any cost inflation could be partly offset by mix benefits for value-led formats (e.g. dollar stores) if consumer pressure drives trade-down. A similar dynamic should support European value leaders and market share winners, such as Tesco in the UK and Jeronimo Martins in Poland, with margin resilience ultimately dependent on how much inflation feeds through and how quickly it is passed on.
Industry preparedness is much stronger. Energy prices are up from recent lows but remain well below the post-Ukraine extremes, keeping conditions “higher but manageable” and reducing the risk of second round food inflation effects. Non-energy inputs (fertilisers, feed, packaging and other farm inputs) are also rising from a much lower base after the late 2023/2024 correction, limiting the need for aggressive repricing. Finally, the supply chain backdrop is more stable than in 2022: global food trade continues to function, with no widespread export bans or structural shortages in core commodities.
Since Russia’s invasion of Ukraine, grocers have strengthened mitigation measures (notably energy hedging) and, where possible, reduced overseas sourcing ahead of peak seasonal demand. Energy typically represents ~0.5–1% of sales and is usually hedged, for example, M&S’s energy contracts are hedged through to 2027, so short lived moves are less likely to be margin destructive. In a prolonged Middle East conflict, higher oil and fertiliser prices would lift production and distribution costs, with pressure concentrated in energy and fertiliser intensive categories rather than broad based repricing. The UK and Europe are more exposed as net energy and fertiliser importers, while the US is relatively insulated as a net energy producer (though fertiliser remains a global risk). Fertiliser is the key vulnerability because gas accounts for ~90% of its variable cost; however, much of current usage was procured ahead of the escalation, so the swing factor is whether input prices ease before the next replenishment cycle.
Even in an optimistic scenario—Strait reopening within 2–3 weeks—and conditions normalising over the following year FDF assumes oil averages ~$80 for the rest of the year and gas prices stay ~50% above February levels, implying some cost pass through over time. Historically, supplier contracts and hedging mean these pressures reach retailers with a 7–12 month lag (though a sharper spike could accelerate this), and while broad based supplier price requests are not yet evident, some are emerging. The most acute near term risk is operational: maritime disruption and emergency freight pricing (with rerouting affecting imports for ~4–6 weeks), which matters most for food given its low value density. Energy also permeates the supply chain and can represent ~10% of manufacturers’ costs (higher for energy intensive subsectors such as baking, sugar, coffee roasting and vegetable oils). Fertiliser remains primarily a price, not availability risk for now (with ~20–30% of UK supply sourced from the Gulf), and much of the season’s requirement is already purchased, limiting immediate pressure; overall, the sector is better prepared than in 2022, although manufacturers remain fragile after recent shocks.
Finally, the diminished availability of fertilisers (about a third of the world supply transits through the Strait of Hormuz), will likely have an effect later in the year on crop yields, and this is likely to create an increase on food inflation, with possible impact on consumer behaviour.
Sheena Berry
Healthcare:
Companies within healthcare typically have low direct exposure to the Middle East, with sales usually a low single-digit percentage or lower. As a result, there is not a significant direct impact.
However, there is an indirect exposure through prices, higher and more complex transportation costs. The increasing inflationary pressure has created uncertainty to the global growth outlook.
Cost inflation, for example, was a major headwind for the medical technology sub-sector following the COVID-19 pandemic with companies impacted by cost inflation in areas such as raw materials, power and labour costs. Operating margins declined as a result with recent macro events raising concerns of renewed inflationary pressures.
An example of how companies are responding includes life science tools company, Thermo Fisher Scientific, incorporating risk for inflation due to oil price volatility in its guidance for the full year. This mainly impacts logistics and whilst mitigation efforts are ongoing, the company felt it prudent to incorporate a placeholder within guidance.
Outside of inflationary pressure, there is risk of helium shortage which is used as a coolant for Magnetic Resonance Imaging (MRI) equipment. This accounts for around 14% to 15% of global helium usage. Medical technology companies such as Philips and Siemens Healthineers are two players in the imaging space.
The disruption could also potentially have an impact on pharmaceutical supply chains, creating higher transportation costs and longer transit times. Pharmaceutical companies typically have supply on hand, but a prolonged disruption may create an impact.
Will Howlett
Banks & Financial Services:
The closure of the Strait of Hormuz affects banks and financial services companies primarily through its impact on the broader economy, rather than via direct exposure to trade flows or commodity markets. Disruption to a major global energy chokepoint has pushed oil prices materially higher, increasing inflationary pressures and adding uncertainty to the global growth outlook. For financials, the implications depend on whether higher energy prices mainly result in persistently higher interest rates, or instead undermine economic activity and confidence.
For banks, the impact is mixed. Higher inflation reduces the likelihood of rapid interest rate cuts, which is supportive for net interest margins and near-term earnings, particularly in regions where margins remain sensitive to policy rates. Recent money-market pricing also suggests a more hawkish tilt than previously expected — with markets implying a non-trivial chance of rate hikes over coming meetings for both the ECB and the Bank of England. Against this, sustained high energy prices act as a tax on consumers and corporates, potentially weighing on loan demand and, in a more adverse scenario, leading to weaker credit quality. At this stage, the effect is best characterised as margin supportive but growth negative: higher rates help interest income, while slower growth increases risks around loan growth and, eventually, impairments.
So far, banks have responded to the heightened uncertainty primarily through prudence in reserve setting rather than sharp changes in reported credit losses, reflecting the fact that only first-quarter results have been reported since the escalation and it is therefore too early for higher default rates to be visible in the data. In recent quarterly results, banks have highlighted greater use of scenario analysis within expected credit loss models, including higher probability weightings for downside macroeconomic outcomes, despite still-benign current credit performance. Consistent with that, a number of UK and European banks have modestly raised NII guidance at Q1 while also taking additional overlays or reserve builds to reflect Iran-related uncertainty and the potential macro effects of higher energy prices.
By contrast, exchanges and market infrastructure companies are generally better positioned to benefit from the current environment. Heightened geopolitical risk and energy-driven macro uncertainty tend to increase market volatility and trading volumes, and we have seen that dynamic explicitly referenced in relation to LSEG, where markets benefited from changing interest rate / inflation expectations and volatility arising from the Iran war. The same dynamic also supported US investment bank trading revenues in the first quarter.
Overall, the impact of the Strait of Hormuz closure on financial services is indirect and conditional. As long as higher energy prices mainly delay monetary easing (and potentially keep hike risk in the discussion) and lift market volatility, the net effect for the sector remains manageable and, in some areas, supportive. The more material downside risk would arise if sustained disruption led to a pronounced global slowdown or recession, at which point weaker loan growth and rising credit losses would begin to outweigh the benefits of higher interest rates.
Jarek Pominkiewicz
General Capital Goods:
The capital goods companies tend to have limited direct sales exposure to the Middle East (on average <5%). The conflict has created significant uncertainty, and while we do not expect curtailment of power generation or data centre capex projects - the sector has demonstrated its ability to pass on raw material / energy cost inflation on, it might delay recoveries in some markets (i.e. short cycle automation). Moreover, rate increases could weigh on construction and consumer-related demand.
Building Materials:
Direct sales exposure to the Middle East is limited (generally <3%). Although energy costs present risk, we think it is somewhat deferred, as most (but not all) companies have hedged a significant portion of their energy expenses. Potential rate hikes could pose a more significant near-term risk, potentially reducing consumer sentiment and delaying recovery in European construction activity.
Phil Ross
Insurance:
Despite some non-life insurers having potential exposure to on-the-ground damage in the conflict area(s), any claims losses are likely to be small and spread widely (and thinly) across the industry. Insurance is largely a defensive sector and we expect these defensive characteristics to mostly hold true in a longer conflict. Inflation in the short-term can increase claims costs for insurers, but the ability to re-price annually (weighted often to January) is a helpful way to combat a potential increase in loss costs. The flip side of inflation is of course higher interest rates (on the assets insurers own), which would likely benefit insurers more than they would lose on the claims (liabilities) side. However, in a more extreme economic slowdown scenario, where there are global credit concerns, balance sheet sensitive insurers (mostly Life names, like Legal & General) would likely underperform, while insurers such as the Nordic non-life names (eg Sampo) will offer good places to hide.
Utilities:
Utilities remains one of the most defensive sectors in the market. Revenues for many of the utility names are regulated (meaning they are highly certain) and in some cases include inflation protection. Some of the bigger utility stocks (e.g. Engie) are also increasingly weighted towards energy infrastructure (power transmission and distribution), meaning their earnings are also largely immune to fuel prices. Most of the sector will also hedge any raw materials purchases (e.g. gas/LNG) for the year ahead, meaning short-medium term spikes in price are unlikely to affect their costs of supply, while those companies with flexible generation/trading operations can benefit from increased energy market volatility. Still, the political focus on a second energy/gas crisis in 5 years means that any excess profits by the industry will likely be subject to levies/taxation, so we expect limited upside - and importantly limited downside.
Oli Creasey
Property:
The first order impact of the Iran conflict on UK property is understandably limited - there is no real supply chain disruption to speak of, or threat to productivity. However, property has proven through 2022 to be highly interest rate sensitive, as housebuilders (whose customers are highly exposed to mortgage rates) and commercial landlords (whose valuation yields tend to hover above gilts) are both negatively correlated to higher interest rates.
While property values are yet to adjust to reflect the ongoing situation (it can take several months for transactional evidence to appear), the share prices of both REITs and housebuilders have responded quickly, and negatively, with both sectors recording double-digit declines in March-26. Persimmon shares fell -17.5% in the month while Segro, the UK’s largest REIT, fell-12.3%. While there has been a degree of rebounding in April, both sectors remain in negative territory since the fighting began, as investors have sought to price in the impact of higher oil prices and inflation on interest rates and hence property values. The uncertainty surrounding the conflict hasn’t helped, with share price volatility up as well as newsflow veers from positive to negative, and back again.
The silver lining for the property sector is that rental growth tends to be positively impacted by higher inflation (albeit the relationship breaks down as inflation goes above c.5%), and this relationship may mitigate some of the damage wrought by higher interest rates. However, GDP growth is also a key driver of returns, and that is also expected to be negatively impacted by the ongoing conflict.
Ben Barringer
Technology:
There are relatively limited primary impacts from the Iranian disruption to the technology sector. However, there are secondary impacts to the semiconductor industry in terms of energy supply, particularly LNG, into Taiwan and gases such as helium. So far, any shortages have been mitigated. However, the tertiary impacts of slower macro-economic growth would impact tech spending overall and digital advertising which would have a negative impact across the broader tech sector. So far, in earning season we have seen some guidance conservatism, but limited material impact across tech
