When Geopolitics Drive Volatility: An Active Approach to the Iran Conflict

Given the recent geopolitical events in Iran, we wanted to provide context by drawing on historical data on how the market has responded to similar shocks.

What Happened in the 2000s?

The U.S. was involved in wars in Afghanistan and Iraq, and at the time, energy prices were rising. Europe was focused on better alignment and integration, the U.S. was digesting the effects of a tech boom, and the US dollar (USD) had been strengthening for 10-plus years.

And there was prosperity for the six years prior to July 2008, essentially before the financial crisis really impacted equity markets (annualized, in USD terms):

• U.S. equities rose 6.7%
• Developed international equities advanced 13%
• Emerging market equities jumped 26%

It’s simple to say that we’ve seen this movie before. It could be a scenario similar to the current one, which has been favorable for all non-US equity markets.

What was it like in 2022?

In 2022, energy prices spiked from Russia’s invasion of Ukraine, which also occurred at the end of February. Equity returns for the year (in USD):

• U.S. equities fell 19.5%
• Developed international equities declined 14%
• Emerging market equities dropped 8%

We have also seen this development before, and the current dislocation in energy prices isn’t necessarily worse for international equities relative to U.S. equities.

In response to the invasion and the resulting energy price spike, many countries and foreign companies adjusted their supply chains to reduce their sensitivity to future commodity shocks. So, while few people are pleased about the current price spike, there should be less pain or scrambling this time around.

What About Inflation?

We believe that it’s unlikely that a move in energy prices will create a dramatic spike in inflation. However, over the past year, we’ve been highlighting how U.S. CPI is acting more like cotton candy: It keeps looking like it could be soft, but it’s really pretty sticky.

Energy prices were modestly deflationary over the last year (once the Saudis/OPEC increased production and prices fell in early 2025), but now energy is likely to be modestly inflationary going forward. This is just another factor why inflation is expected to remain closer to 3% than 2% in the foreseeable future, keeping the Fed on hold with interest rates for longer.

An Equity View

The primary question as an active investment manager is: What is our view and how are we positioned to navigate, and potentially take advantage of, this bout of volatility?

For some time, our equity team has been highlighting how U.S. capital markets are priced for perfection. The conflict in Iran is just one of many sources of risk that haven’t been notably priced into risk premia across asset classes. Investors have been willing to pay higher valuations for higher visibility, and Iran is another proof point that visibility isn’t as good as is priced into many stocks (particularly those in the U.S.).

It’s important to remember that we are looking for companies that exhibit resilience and durability. And while we aren’t making predictions specifically about Iran, we strive to own companies that not only survive but thrive in complex environments.

When unexpected risks arise, companies with high balance sheet leverage face greater risk because they are layering balance sheet risk on top of fundamental risk. That’s why we seek companies with relatively healthier balance sheets than their competitors.

Here are some other key differentiators:

• We are highly active managers, always highly focused on downside risks, which goes beyond the ways solid fundamentals create downside protection.
• Lower valuations and higher dividend yields are another form of defense for stocks.
• We look forward to periods of market dislocation because they provide opportunities.
• If the fundamentals are unchanged, we maintain conviction in existing holdings during times of market volatility.

A Fixed Income View

We have long highlighted that credit spreads in many sectors remain historically tight across global bond markets. The recent actions in Iran reinforce the point that unexpected risks are not always fully reflected in today’s credit risk premia. As noted in our 2026 Fixed Income Outlook, markets have at times been priced for stability in an environment where the range of potential outcomes remains wide.

We don’t want our fixed income portfolios to behave like equity proxies, but rather to provide income, diversification, and attractive risk-adjusted returns. We are not positioned for any single geopolitical event but have sought to avoid relying on incremental credit risk or spread compression to generate returns in a market where spreads offered limited compensation for uncertainty.

When unexpected risks emerge, lower-quality or more leveraged issuers are often most vulnerable to repricing. We have maintained a deliberately defensive posture that emphasizes higher-quality income and more resilient balance sheets over incremental yield. We also remain focused on downside risks and asymmetric outcomes. Historically tight spreads can leave little room for error, and widening risk premia may disproportionately impact a reach for yield.

As active managers:

• Periods of volatility can create opportunities to add risk selectively and opportunistically when valuations become more compelling.
• Maintaining current flexibility allows us to deploy capital more effectively if credit markets begin to offer improved compensation for risk.

Key Takeaways

Heightened geopolitical tensions tied to the Iran conflict have increased market volatility. However, history suggests such shocks can create opportunity rather than lasting damage. In equities, we strive for disciplined positioning that favors resilient companies, strong balance sheets, and reasonable valuations. In fixed income, we endeavor to maintain a defensive, quality-focused approach amid tight credit spreads and asymmetric downside risks.