The violence that broke out in the Middle East at the weekend – unfolding by the minute as we write – has already sent up crude oil and gold prices – the latter being a classic safe-haven asset. Iran has shut the Strait of Hormuz, creating a chokehold on shipping in and out of the Gulf. Israel and the US pounded targets in Iran. Rockets and drones have been fired from Iran at a number of Gulf states, including the UAE, and even at a British air force base in Cyprus. 

President Donald Trump signalled that conflict with Iran could last for weeks in its bid to destroy the Islamist regime that has been a thorn in the side for the US since fall of the Shah in 1979.

Stock markets slid in early-morning trade as investors increased the risks to the global economy. Futures for the S&P 500 fell 1.5 per cent as stock prices retreated across a number of regions. Prices for natural gas – the Gulf is a major exporter – rose. Brent crude oil fetched almost $80 per barrel, up almost 8.9 per cent. Gold rose to $5,397 per ounce in early-morning trade in London. 

Gross demand for gold jumped 104.8 per cent by weight from the past 365-day average as Tehran’s ensuing retaliation made headlines around the world, while selling fell 9.5 per cent, according to marketplace BullionVault.

Where does this leave wealth jurisdictions in the Middle East?

While the financial market focus was understandably on what the conflict means for energy prices and trade, there is another dimension that will concern the cluster of private banks, wealth managers and private client advisors who have flocked to the United Arab Emirates and other Gulf states – home to jurisdictions such as Abu Dhabi and Dubai – in recent years. According to Boston Consulting Group, the UAE, for example, was projected to be home to almost $1 trillion of cross-border wealth by 2029 from $700 billion in 2024. A question that arises is how the geopolitical risks will shift the balance of power in where IFCs are located. For example, it is probable that this will play to the strengths of jurisdictions such as Switzerland. It is worth remembering that a number of UHNW individuals and those less affluent have moved from places such as the UK to Dubai – a point noted here in our recent features on "family offices in motion." (See here and here.)

The drama also reinforces a point that this news service wrote about here that geopolitical risk is now a central agenda item for wealth advisors to master, and this will need to be factored in when it comes to deciding where to locate staff, booking centres and operations, as well in the education of advisors.
 

Oil, gold and stocks

“From a financial market standpoint, all eyes will be focused on the oil markets given that Iran produces circa 3 per cent of the global output – the fourth largest producer in OPEC,” Hou Wey Fook, chief investment officer, DBS Bank, said. “The key swing factor will depend on whether Iran moves to shut the Strait of Hormuz, an important chokepoint where roughly one-fifth of the global crude oil and LNG passes through. A prolonged closure of Hormuz will cause huge disruption to the global oil trade given that even the spare oil capacity from gulf producers has to pass through this strait. To make up for the shortfall, the US can in theory tap its Strategic Petroleum Reserve (something which it has currently ruled out). But in the event of a full-fledge crisis, the strategic stocks in the US will also be insufficient to offset the damage.”

“Crude oil price could hit $100 to $150 a barrel in the extreme scenario of full blockage for the Strait of Hormuz. This will be problematic for risk assets on two fronts: 1) Surging oil prices arising from supply shock translate to higher inflation expectations, limiting the room for the Fed to cut rates; 2) Inflation surge to weigh on economic activities, increasing the likelihood of a global recession,” Hou Wey Fook said.

“The global economic impact of conflict in the Middle East will hinge on its effect on energy markets. If oil stays near $70 to $80 per barrel, developed market inflation will be only about 0.2 to 0.3 percentage points above our baseline forecast and the broader economic fallout should remain limited,” Neil Shearing, group chief economist, Capital Economics, a UK-based consultancy, said. “But if prices climb to $90 to $100, DM inflation could rise up to 0.7 percentage points and we would probably shave a few tenths from 2026 GDP growth forecasts. The US is far less exposed than Europe or Asia.”

"Investors should recognise that in the immediate aftermath of an event of this scale there will be a jarring set of headlines and we are seeing high, potentially peak, uncertainty,” Adam Hetts, global head of multi-asset and portfolio manager at Janus Henderson Investors, said in a note. “Rather than trying to market-time geopolitical realignment and the associated risk we believe in maintaining exposure to the long-term secular growth trends that will continue to shape markets globally".

The Franklin Templeton Institute said the initial market reaction for the conflict will typically see a fall in US Treasury yields – a safe-haven move – and a fall in stocks (as has transpired).
 
“Impacts on activity/earnings may be delayed and uneven. The US dollar reaction is not guaranteed; gold tends to benefit while bitcoin has been trading like a risk asset (i.e., down with equities), reinforcing that it’s not typically a reliable hedge/diversifier in geopolitical drawdowns,” the organisation said. 

“Markets often learn 'this is short-run’ (we are not calling for buy-the-dip yet): Historically, geopolitics often produce an initial jump in risk premia before investors conclude the aggregate earnings hit is modest. We would not yet label this a clean buy-the-dip setup – duration, shipping/insurance mechanics, and the endgame matter more than the first headline,” it said. 

The wealth management firm Bentley Reid talked about the issues facing clients in the UAE.

“We have spoken to multiple clients and industry contacts since the conflict began. Overall, there is a collective sense of calm and reassurance that the UAE authorities are handling the situation effectively,” Peter Clark, CEO, said in an emailed statement. “Few conversations have been dominated by the potential impact on their investment portfolios. The discussions are focused on the general uncertainty, their personal/family circumstances and how/when the conflict may end.

“Heightened volatility has become a constant feature in markets over the past five years and the likes of the pandemic, the Russia/Ukraine war etc. provide useful reminders that the long-term market impact from geopolitics and other exogenous events tends to be short-lived and limited.

“The relatively benign reaction, both from clients and markets so far, means there has been no need to counsel against clients making short-term decisions. We spend a lot of time with our clients to help devise investment strategies that are relevant to their personal circumstances so exposures to the more volatile assets like equities and commodities will be in place for a specific, typically long-term purpose and they are typically ‘hedged’ with dedicated cash reserves or low risk allocations to help prevent forced selling.

“If, or when, a client's specific situation changes and I do not envisage there being many, if any, cases whereby the conflict fundamentally changes a family's plans around retirement, succession planning or any of the other personal matters or events that form the bedrock of their investment strategy and wider wealth management arrangements,” he added.