How War in Iran is Impacting Australia’s Sharemarket (And What it Means for Your Portfolio)

What the Iran War Means for the ASX (and Why It Matters for Your Portfolio)

The Iran war has disrupted global sharemarkets, and the ASX has been no exception. As tensions escalated following the US and Israeli strikes of 28 February, investors sold off quickly, with the ASX200 falling more than 8% since the beginning of March.

While there have been short periods of recovery as signs of de-escalation emerged, at the time of writing our local sharemarket remains well below recent highs. At the same time, oil prices have spiked, raising fresh concerns about inflation and the trajectory of local interest rates.

Volatility like this can feel unsettling to Australian investors, but it isn’t unusual. For investors with well-constructed portfolios, it’s also not cause for alarm.

With that in mind, we look at what the ongoing tensions in the Persian Gulf mean for Australian investors and what you can do to navigate them.

What we’ve already seen: repricing, not panic

The ASX 200 began March at 9,126 – close to its all-time high. Then, as hostilities escalated, global trade routes (most notably the Strait of Hormuz) became disrupted and the price of Brent crude oil spiked at over US$112 per barrel, it began to fall.

However, the sharemarket action has been far from one-way traffic, with short-lived rallies occurring even as the broader pattern was downwards. For instance, when on 23 March, US President Donald Trump offered Iran a five-day reprieve and floated the prospect of peace talks, oil prices fell by over 10% in a single session. The ASX responded the very next day by surging almost two per cent.

This is how markets tend to behave in the short-term; they’re driven by headlines more than fundamentals. That’s because when conflict escalates and disruption looks likely to worsen, investors sell. When resolution seems possible, optimism returns and buying follows – pushing prices up again.

What this shows is that sharemarkets are unusually sensitive to perceived day-to-day changes in economic conditions, and that sensitivity runs in both directions. That’s because shares are among the most liquid assets in the world, and that liquidity can translate into almost immediate price movements.

However, this short-term volatility doesn’t always reflect what happens over the longer term.

How rising oil prices flow through to the share market

While conflicts may cause the sharemarket to go up and down very quickly, they rarely damage it directly. Instead, what they can do is change underlying economic conditions by impacting supply chains and causing the price of inputs to rise.

This is exactly what’s happening in the current Iran war, and it’s happening to one of the most important inputs in the modern economy: oil. When oil prices rise, the effect doesn’t stay contained, but moves quickly through the entire system because it affects the price of fuel.

Almost everything that we consume needs to be transported from somewhere else. Rising oil costs make logistics more expensive. Those higher costs are passed onto retailers, and then to consumers. So, in a relatively short period of time, what began as a geopolitical event shows up as higher prices across the economy – or inflation.

This matters directly for shares because their value is essentially a claim on future profits. As inflation increases, investors demand higher returns, which means they’re willing to pay less for those same future earnings. Prices adjust accordingly – even if nothing has changed about the underlying business.

And it doesn’t stop there.

Inflationary pressures force central banks like the RBA to increase interest rates to counter them. These higher rates also make borrowing more expensive for businesses, squeezing margins further and reducing profitability. This ultimately weighs on share prices too.

Why uncertainty amplifies market volatility

There’s also a third, less visible force that conflict-based inflation unleashes. And that’s uncertainty itself.

When prices begin rising companies no longer know what their input costs will be next quarter or and consumers tend to stop spending on discretionary items. As this happens, planning gets harder, investment decisions get deferred and profit forecasts become less reliable.

Investors tend to respond by demanding a higher return to compensate for that unpredictability, which means they’re willing to pay less for the same earnings. So share valuations fall.

It’s this combination of higher costs, higher rates and higher uncertainty that stands as the real long-term threat to the ASX.

What history tells us about war and share markets

Neither geopolitical conflict nor the market volatility it produces are new territory. Two historical episodes offer different paths for what to expect: one reassuring, one a cautionary reminder.

The 2003 Iraq War is the closest parallel. As the invasion approached, uncertainty pushed investors toward the safety of cash and fixed income, with the US 10-year Treasury yield falling around 40 basis points as capital flooded into government bonds.

The ASX also fell around 10% in the immediate aftermath of the US-led invasion. Then it recovered almost immediately, rising around 20% over the following 12 months. The reason was simple: the conflict never became an inflation problem, so it never became a sustained market problem.

The more sobering reference point is the 1973 oil crisis. When OPEC imposed its oil embargo following the Yom Kippur War, oil prices quadrupled almost overnight. The inflationary shock was both global and severe: Australia’s inflation rate climbed from 4.7% at the start of 1973 to a peak of 17.7% by March 1975.

As a result of this inflation, the ASX lost almost 60% from its 1972 peak. Recovery was slow, uneven, and for some companies never complete.

What made 1973 different wasn’t the geopolitical trigger, it was that the oil shock was sustained and structural, arriving into economies already running hot – a key distinction from today.

But the lesson from both episodes is the same: the conflict itself is rarely the determining factor. What matters is whether it produces a lasting disruption to oil supply severe enough to become an inflation problem that central banks have to respond to.

So far, markets appear to be treating the current situation more like 2003 than 1973. That is, as a serious but potentially short-lived disruption rather than a structural shift.

Whether that holds depends almost entirely on what happens to the Strait of Hormuz – a narrow stretch of water between Iran and Oman/the United Arab Emirates, through which 20% of the world’s entire oil supply passes in tankers.

How should Australian investors respond to war in Iran?

The instinct when markets fall sharply is to do something: to sell, to wait it out in cash, to try to time the recovery. This is understandable and even natural, but it’s also one of the most reliable ways to turn a paper loss into a real one.

The investors who tend to navigate market volatility like a conflict best aren’t those who predicted it. They’re those who were already positioned to withstand it, and to act when opportunities emerged.

But your ability to do this as an investor comes down to two things: being diversified across assets that don’t all move in the same direction at the same time, and being disciplined enough to hold the line even when headlines suggest you shouldn’t.

Here are three things you should be doing with your investment portfolio right now.

1. Let fixed income do its job

When equity markets sell off, fixed income tends to behave differently. And that difference is exactly what a well-constructed portfolio is designed to exploit.

In the early stages of geopolitical uncertainty, investors typically move capital toward government bonds and other fixed income products. This pushes prices up and yields down, and provides a short-term buffer for portfolios with defensive exposure. We saw this in the Iraq War, and we’ve seen echoes of it in the current conflict.

But fixed income’s more important role isn’t the short-term flight-to-quality trade. It’s also structural: it generates incomes no matter how markets perform, reducing the overall volatility with a portfolio.

And, fixed income provides even more than stability. As we’ll explain in the next point it also gives you the liquidity to act when others can’t.

2. Rebalance (which may mean buying more shares)

This may seem counterintuitive, but it’s important.

A well-constructed portfolio is built around a target allocation (e.g. say, 60% growth assets like shares, 40% defensive assets like fixed income and cash). When markets fall sharply, that balance shifts.

If you started off with a 60/40 portfolio and the value of the shares drops 8% while your fixed income holdings hold steady, your allocation begins to look closer to 55/45, and that means your risk profile has changed too.

Rebalancing means restoring that allocation – which, in a falling market, means buying more shares at lower prices. That’s not because you’re trying to pick the bottom, but because you’re maintaining the structure you’ve already decided best suits your financial goals.

3. Focus on long-term structure, not short-term noise

It’s worth remembering that despite the recent sell-off, the ASX 200 remains well above its 12-month low of 7,667 points. Markets recovered after the Iraq War and they recovered after the 1973 oil shock, even if it took a while longer. They also recovered after COVID, after the GFC and after every episode of geopolitical volatility that felt, in the moment, like it might be different this time.

The risk in volatile markets isn’t just losing money, it’s also about the risk that comes from making permanent decisions based on temporary conditions. Selling in a downturn locks in losses and almost always means missing a significant part of the recovery.

The bottom line: How oil prices, inflation and interest rates are impacting the ASX

Geopolitical events can unsettle markets quickly, and the Iran conflict has done exactly that. But the pattern we’ve seen over recent weeks (sharp falls, partial recoveries and headline-driven swings) is less a sign of structural damage than of markets doing what they always do in the face of uncertainty: that is, reprice rapidly, in both directions.

The more important question was never what happens next in the Middle East. It’s whether your portfolio was built to handle the fact that you can’t possibly know. That way, when markets eventually recover –  as they have after every previous episode of geopolitical volatility – you’ll be in a position to benefit rather than scramble.

In other words, a portfolio built for uncertainty doesn’t need to predict what happens next. It just needs to still be standing – and still be balanced – when the fog clears.