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How should investors respond to geopolitical developments in the Middle East?
“As an investor, what would you have done if you’d known in advance that war would break out in the Middle East between Israel and Iran, or that the US would bomb Iran? Most would have backed out of markets, but that would have been a mistake. Markets have an amazing ability to shrug off geopolitical risks.”
That was the message from Michael Strobaek, Lombard Odier’s Global CIO, as he joined Samy Chaar, Chief Economist and CIO Switzerland, for a webinar devoted to analysing how investors should respond to the recent conflict between Israel and Iran. Together, they explored the economic impact of the Iran-Israel conflict, the wider lessons that can be learnt, and took a broader look at the economic landscape investors might expect in the second half of 2025.
Conflict that has minimal impact on energy and supply chains leaves the global economy largely untouched
When geopolitics move the market
Opening the webinar Samy Chaar said, “the key working assumption for us at Lombard Odier has been the idea of a narrative shift. We entered the year in a high growth environment, dominated by the US, but since then we’ve seen a step up in uncertainty. There’s geopolitical uncertainty and there’s business uncertainty, but when it comes to our macro analysis, we’re more concerned about business uncertainty. So, why did we believe that geopolitics would not have a major impact on economic conditions?”
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The answer, he explained, is in maintaining disciplined analysis instead of reacting to shock headlines. “For geopolitics to have a significant impact on economic and financial conditions, it takes energy markets and supply chains to be disrupted. Conflict that has minimal impact on energy and supply chains leaves the global economy largely untouched.”
“We believed this would likely be the case in this instance, because for the Iran-Israel conflict to have a negative impact on economic conditions, Iran would have to have disrupted the Strait of Hormuz. We thought that wouldn’t happen because Iran needs the revenue from their oil sales. Most of what is shipped through Hormuz goes to Asia, and the main victims of closing the Strait would be China and Middle Eastern Gulf states. This is not what Iran would want.”
“Energy prices remained relatively well behaved, as we expected,” he continued, “and did not give us a negative signal for the economy and financial markets. We’ve had war in eastern Europe, and in the Middle East. These are very difficult situations, but the economic impact remains contained unless there is a hit to energy and supply chains.”
One key lesson for investors… is that they should never rush into hasty selling
Buying the dip
Michael Strobaek agreed. “We didn’t know that we’d find ourselves in a major Middle East stand-off but, with the exception of oil, markets largely ignored it. Solid returns have continued across most equity, commodity and bond markets. Lombard Odier has not at any point taken a ‘risk-off’ approach. 2025 is looking like it will be okay for investors.”
One key lesson for investors, he explained, is that they should never rush into hasty selling. “Markets react most aversely to recessions and systemic crises, and we haven’t seen either,” he said. “Donald Trump’s ‘Liberation Day’ tariff announcement felt very uncomfortable, but in those moments you should never try to sell, or run away when a major dip is staring at you. At that point, you’re already too late. It’s actually at that point that you should consider buying.”
“This year there have been times that reminded me of 2020 – though not as dramatic. We have been advising clients not to panic-sell the dip. The lesson is to buy during those moments, because equity markets climb a wall of worry, and they do it very well. Markets have proven yet again that they’re remarkably resilient. Already we are seeing all-time highs, which is what we anticipated. And if interest rates start to go down in the US, then we have factors that will drive markets higher still – strong earnings, appealing risk premia, and falling interest rates.”
A recession scenario would be signalled by Americans losing their jobs and incomes, then consumption would contract. But Americans keep making good wages, so they are able to absorb the impact of higher tariffs
Looking ahead to H2
Looking ahead, Samy Chaar noted that while geopolitics have had minimal impact on markets so far this year, President Trump’s tariff strategy has led to a “deterioration of business conditions that will impact the economy and markets.”
“We’ve seen an increase in tariffs to a level not seen since World War II,” he explained. “We will land at a tariff level, and a level of business uncertainty, that is higher than we saw in 2023 or 2024. The US consumer will have to pay for these higher tariffs, and that will lead to a slowdown – this is now unavoidable.”
However, “recession is avoidable because the US labour market is still looking okay,” he continued. “A recession scenario would be signalled by Americans losing their jobs and incomes, then consumption would contract. But Americans keep making good wages, so they are able to absorb the impact of higher tariffs. Real incomes and consumption will slow, but neither will contract. Investors should not expect a recession.”
“This is helped by the fact that Europe has now woken up to the need to invest in their own economy, particularly in defence and infrastructure. Germany is 30% of EU GDP, so their recent commitment to capital investing also helps the European outlook. Then we also need to factor in that the private sector – particularly in Europe – is in good shape. When we talk about debt, we always talk about the public sector. But we forget that most European countries have a surplus of overall savings if you look at the balance sheets of banks and private households. Europe is in much better shape than it was in just 15 years ago during the financial crisis.”
“Then, lastly, central banks are cutting rates. We’ve had eight consecutive cuts by the European Central Bank, and Switzerland is now at 0%. At Lombard Odier, we believe the US Federal Reserve will shift its policy stance from restrictive to neutral, so investors should expect a couple of cuts in the US. This will further keep any recession risks at bay.”
We believe the US Federal Reserve will shift its policy stance from restrictive to neutral, so investors should expect a couple of cuts in the US. This will further keep any recession risks at bay
Our strategy
How should investors respond? “We are in an environment of handsomely expanding earnings,” Michael Strobaek explained. “The US has been at the forefront of exceptionalism, driving the earnings picture through tech firms” and with many stocks “powering ahead regardless of geopolitical tensions. It is likely that the second half of 2025 will be fine, especially as the Fed starts to lower rates. We are overweight equities at this point.”
“But equities are not the only game in town,” he continued. “We are also overweight fixed income. From a multi-asset investor perspective, both the yield and equity environments are favourable.”
One casualty, he explained, has been the dollar. “When any country experiences political uncertainty, it is normal that investors withdraw assets and capital flows, this hits the currency. The dollar is likely to stay weak for now – my view is it is now anchored in a range of 1.15-1.20 compared to the euro. At Lombard Odier, we have taken a neutral FX position.”
With all this in mind, Samy Chaar asked, “What could derail our investment policy?”
“The number one thing we want to see is inflation come down,” Michael Strobaek said. “We want to see the Fed cut rates. We don’t know all the impacts of the tariffs yet, and inflation is the chief risk. Recessions are bluntly signalled by weakness in the US consumer and labour market, so investors should watch for that.”
Concluding, he said, “my view, as we head into the second half, is that the risk is more to the upside than the downside. If the Fed starts lowering rates, you don’t want to be underinvested. Overall, the way investors should respond, is that they should focus more on the economic fundamentals, and less on the geopolitical headlines.”
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