3 market themes as geopolitical risk flares again

Over the weekend, the US and Israel launched coordinated strikes on Iranian military and missile infrastructure following stalled nuclear negotiations. 

Iran retaliated across Israel and Gulf states, airspace closures followed and disruption around the Strait of Hormuz has reintroduced energy chokepoint risk into markets. 

Roughly one-third of global crude production sits in the Middle East and close to 20% of global oil consumption transits daily through Hormuz. Iran’s leverage is geographic as much as military, and markets tend to respond to perceived disruption risk well before realised supply loss.

This escalation did not arrive into a relaxed market. In the weeks leading into the weekend, energy had already been moving higher and precious metals were firm. Defensive and lower-volatility exposures had been outperforming, while higher beta areas such as small caps and growth were softer. Volatility measures were elevated and hedging was not cheap (see below VVIX rising over the past two months).

In other words, investors had already been adjusting for a more uncertain backdrop. The weekend strike builds on an existing risk premium rather than introducing a new one from a position of complacency.

Over the past week, oil and gold have firmed, the US dollar has strengthened and yields have softened, though real yields have not materially broken lower. Over the past month, energy and precious metals were already trending higher, while equities were more influenced by AI rotation and macro data than geopolitics alone.

The absence of a collapse in real yields suggests this remains a risk premium event rather than a confirmed growth shock.

Scenarios from here

#1 Base case – contained but tense

In this scenario, retaliation continues but remains measured and partially telegraphed. Shipping disruption around Hormuz proves temporary and insurance markets normalise within weeks. There is no sustained impairment of physical supply.

Oil would likely hold an elevated risk premium but struggle to move structurally higher. Gold would retain support given geopolitical uncertainty. Equities would remain volatile but stabilise as escalation risk plateaus. Real yields would remain broadly intact, allowing the US dollar to stay firm in the near term.

Under this outcome, geopolitical friction remains structurally higher, supporting medium-term allocations to gold, defence and energy security without triggering a broad macro reset.

#2 Bear case – sustained Strait disruption

Disruption to Hormuz flows persists, tanker insurance remains impaired and physical supply is materially affected. Energy becomes a true macro shock rather than a volatility event.

Oil would likely move structurally higher and LNG markets would tighten significantly. Asian economies, particularly China, India, Japan and Korea, would face growth pressure first given their structural import dependence. Equity markets would broaden into risk-off territory and real yields would likely fall as growth expectations weaken. The US dollar would initially strengthen on risk aversion but could later become more sensitive to global growth dynamics.

In this environment, gold would likely outperform meaningfully as both geopolitical and macro uncertainty rise. Defence exposure would benefit from accelerated military spending expectations. Energy infrastructure and security themes would move from cyclical to structural tailwinds.

#3 Bull case – rapid containment

In this scenario, backchannel diplomacy limits further escalation and shipping flows normalise quickly. The market’s elevated starting risk premium compresses.

Oil would retrace sharply as supply fears fade. Gold would likely give back part of its recent gains but remain supported structurally. Equities could experience a relief rally given how elevated volatility metrics were coming into the event. Real yields would remain anchored to macro data rather than geopolitical risk.

Under this outcome, the broader thematic direction remains intact, but near-term tactical upside would favour cyclicals over defensive positioning.

Thematic implications across scenarios

#1 - Gold

Though gold has rallied extensively over the past two years, the pace of the rally right now is not unprecedented.

In fact, it is actually quite muted when you compare it to the significant repricing of gold observed in the late 1970s in the lead-up to Volcker's fight against inflation, which was itself triggered by the 1973–1974 OPEC oil embargo and then the 1979 Iranian Revolution. 

In 2024–26, we have observed a very constructive environment for gold, with significant geopolitical volatility, falling interest rates, a poorer economic outlook and an increasing narrative around de-dollarisation. 

The recent market volatility triggered by AI disruption in software, combined with the fresh risk of an energy shock and inflationary pressures stemming from US and Israel's attack on Iran, have added on top of that bullish environment new developments which look strikingly similar to the late 70s rally and may be the final tipping point that potentially triggers a gold supercycle in which there is sustained, strong outperformance. 

In the short term, we believe markets are underpricing the risk of a dragged-out, sustained conflict in Iran, which could translate to persistently high energy prices that lead to stickier and hotter inflation and, in turn, complicate the rate path for the Federal Reserve and risk an economic downturn. These are positive scenarios for gold.

For investors seeking direct exposure, vehicles such as Global X Physical Gold (ASX: GOLD) provide a straightforward way to access bullion without holding physical metal.

#2 - Defence

Defence spending is anchored to structural geopolitical shifts rather than short-term volatility. Even if this escalation proves contained, the broader move toward bloc formation and strategic rivalry remains intact. 

The world is increasingly operating in a Cold War framework, with sustained military modernisation across the US, Europe and parts of Asia. Spending is also shifting toward defence technology, including missile systems, drones, cyber and AI-enabled capability. 

That creates a multi-year tailwind that is less cyclical and more policy-driven than traditional industrial demand.

The Global X Defence Tech ETF (ASX: DTEC) offers exposure to global defence contractors and next-generation military technology companies positioned to benefit from structurally higher defence spending.

#3 - Energy

Energy sits at the centre of this escalation because the Middle East remains critical to global supply and Asia remains structurally dependent on Gulf flows.

Even without realised supply loss, perceived disruption to Hormuz tightens freight, insurance and pricing dynamics quickly. In the near term, oil will respond to the duration and credibility of disruption risk. In a contained scenario, risk premia can fade. 

In a prolonged disruption, energy moves from volatility event to macro shock. 

Structurally, however, this reinforces the case for energy security, LNG infrastructure and diversified supply. Governments and corporates are unlikely to reduce investment in supply resilience in a world of rising geopolitical friction.

The key variable remains duration and scale of disruption in the Strait of Hormuz. 

Without sustained impairment of energy flows, history suggests spikes tend to fade. With sustained disruption, the macro implications broaden materially, particularly through Asia’s energy dependence.

This is an energy leverage event testing an already elevated risk premium.

The Global X Bloomberg Commodity ETF (ASX: BCOM) tracks a diversified basket of commodities, allowing investors to express a broader inflation and supply-shock hedge rather than a single-commodity view.

Longer term implications

The more important macro channel here is Asia, not the US.

China, India, Japan and South Korea remain structurally dependent on Middle East crude and LNG. China imports roughly 11mb/d, India close to 5mb/d, and Japan and Korea remain heavily reliant on Gulf flows. A sustained disruption through Hormuz therefore tightens the growth impulse in Asia first, before it meaningfully hits the US.

That matters because Asia has been the marginal demand engine for global energy over the past two decades. If shipping disruption persists, the pressure will show up through Asian currencies, trade balances and industrial margins before it shows up in US consumption.

In the base case of contained disruption, the impact is largely a volatility premium. In a prolonged disruption scenario, it becomes an Asian growth story with global spillovers.