The Middle East crisis: Why staying calm is more important than ever

The conflict in the Middle East between the US, Israel, and Iran has created a sustained period of global turbulence, and the lives of many civilians in multiple nations are being threatened on a day-to-day basis.

These tremors have also led to a period of prolonged financial uncertainty as stock markets and world economies react to the conflict.

When your wealth looks to be at stake, it’s easy to feel nervous. However, it’s also important that you don’t make any rash decisions, like moving your investments to cash in response to market volatility.

Keep reading to discover key economic forecasts for the conflict that might affect your financial plan, as well as the importance of staying calm and letting your financial adviser reassure you during periods of economic uncertainty.

3 key impacts of the Middle East conflict on the global and UK economy

1. The stock market has been volatile, but balanced portfolios have seen limited losses

The stock market dive following the outbreak of conflict was largely fuelled by the blockade of the Strait of Hormuz, a major route for global energy trade – 20% of the world’s oil and liquefied natural gas usually passes through it, the BBC reports.

Fears of a prolonged energy shock, higher inflation, reduced economic growth, and a breakdown of diplomatic negotiations spooked investors, causing equity market volatility. The FTSE All-Share saw a 12.59% drop between 27 February and 23 March, according to London Stock Exchange (LSE) data, although it made a quick and moderate recovery in the weeks that followed.

While stocks declined, bond yields spiked, and Goldman Sachs found that losses to balanced (diversified) portfolios were largely limited.

This reaffirms the importance of maintaining a diversified portfolio of different asset classes in different markets and geographical locations to help you reduce risk and keep your long-term plans on an even keel.

2. The UK’s growth forecast has reduced, and inflation is predicted to be higher than expected

The Organisation for Economic Co-operation and Development (OECD) has downgraded economic growth forecasts in response to the conflict. The UK economic growth forecast has been reduced to 0.7%, the biggest drop out of any of the G20 major economies, the BBC reports.

Low economic growth can cause higher unemployment and stagnant wages.

Additionally, while the Office for Budget Responsibility (OBR) predicted Consumer Prices Index (CPI) inflation to reduce to 2.3% in 2026, new forecasts for UK inflation predict it to rise to 4% this year (according to the OECD).

If inflation is high, it can reduce individual purchasing power and raise the cost of living. This means that your day-to-day bills might increase, and you could have less disposable income to contribute towards your long-term savings and investments.

3. Interest rates are unlikely to fall, and the Bank of England (BoE) may even increase the base rate

When inflation increases, interest rates typically follow suit.

Higher interest rates influence how much people spend, which in turn influences how shops and other businesses set their prices.

If inflation rises due to the Iran conflict, the Bank of England (BoE) will likely increase interest rates to encourage saving and reduce spending. A recent example was when the BoE increased rates to 5.25% in August 2023 in response to rising inflation following the economic aftermath of the Covid-19 pandemic (according to House of Commons Library data).

One of the more obvious effects of high interest rates is higher charges on many mortgages and loans. According to a Reuters report, two-year fixed mortgage rates increased from 4.83% to 5.51% in the 24 days since the conflict began.

This means that it might be more difficult for you to buy or sell your home. And if you own variable-rate mortgages, you could face higher costs on your mortgage payments.

3 reasons why staying calm and avoiding rash decisions is normally the best course of action

1. History tells us that markets usually recover

While declining stock markets can make investors panic, it’s important to remember that history tells us markets usually recover over time.

We wrote about this topic previously when the “Trump Tariffs” were first announced: Why the market volatility from the Trump tariffs is a reminder of the importance of staying invested.

While the Trump tariffs caused indices like the FTSE All-Share to drop as low as -7.94% on 9 April, it ended the year with record-breaking returns of 18.65%, according to LSE data.

This underscores the importance of being resilient with your investing rather than giving in to pressure to offload your investments as soon as the market turns.

Note: Past events are not a reliable indicator of future performance, but they can reassure us that markets can recover and continue to grow.

2. Remember that investing is a waiting game

Investing is often portrayed as a high-stakes gamble, where a £10,000 investment can yield results hundreds of times that amount in a matter of days.

Stock market reality is much different.

Seasoned investors would testify that the purpose of your portfolio is to increase the value of your wealth over an extended period of time. For example, £10,000 invested in the FTSE All-Share over 20 years from 1 January 2006 would have benefited from price growth of 82.7%, according to LSE data.

However, if you had dropped your investments during the 2008 Financial Crash, you could have missed out on these returns while also solidifying your losses.

Remember that one of the keys to investing successfully is patience. The longer you wait, the more substantial your returns are likely to be.

3. Your financial adviser is in your corner

If you are feeling nervous about how global events are affecting your wealth, you can reach out to your Caliber financial adviser for reassurance.

We keep track of global economic events to help you make the best-informed decisions about your money, whether that’s to stay on course or make necessary adjustments to help soften an economic blow.

Find out how we can help by emailing us at contact@caliberfm.co.uk or calling 01525 375286 to speak to one of our team today.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

The Financial Conduct Authority does not regulate buy-to-let (pure) and commercial mortgages.