The longer-term implications of an energy-price spike are numerous and complex

Patrick Farrell, Chief Investment Officer at Charles Stanley, part of Raymond James Wealth Management:

Another energy shock: understanding the risks

The longer-term implications of an energy-price spike are numerous and complex. The inflationary impact of the supply shock following Russia’s invasion of Ukraine remains fresh in investors’ minds. However, the market reaction so far has been proportionate – and, arguably, relatively muted. Global energy systems are better positioned today due to the diversification efforts undertaken in recent years, and markets appear less inclined to extrapolate worst-case scenarios.

Europe and Asia would be the hardest hit should energy prices remain elevated, as both regions are major net importers of oil and gas. Nonetheless, the structural improvements made since 2022 mean governments and industries are better equipped to manage such supply disruptions.

Equity markets: volatility, but signs of resilience

Major stock indices initially fell as investors digested the risk of prolonged supply disruption. Markets have since shown signs of stabilisation, helped by reports that the Iranian regime may be seeking dialog with Washington.

Across global markets, sectors tied to travel, airlines and hospitality have weakened due to disrupted routes, while energy and defense shares have risen as investors rotate toward areas seen as beneficiaries of higher oil prices and elevated geopolitical risk. This volatility is likely to persist.

Bond markets: signalling broader economic implications

Yields on government bonds have risen as markets reassess the interest-rate outlook.

Markets had expected the next move in interest rates in major Western economies to be down. Now, given the prospect of an energy-driven inflation spike, there is a risk that some central banks could raise rates instead.

Despite these pressures, oil prices remain well below historical highs in real terms. Markets are behaving in line with previous geopolitical shocks: a sharp initial reaction followed by stabilisation as investors assess how long the crisis might last.

Of course, the situation is concerning, particularly so for the people directly affected by these actions. We do not know if Washington has any potential outcome in mind, so the length and scope of the military action is challenging to forecast. However, history suggests a well-constructed and diversified portfolio remains the correct course of action in dealing with events such as these.

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