What to Do When a Geopolitical Conflict Triggers Market Volatility

The recent crisis in the Middle East has brought back the familiar mix of nerves and uncertainty that typically accompanies conflicts of this kind. Major indices have fallen, commodity prices—especially energy—have risen, and investors have rushed into safe-haven assets.

When these episodes arise, markets tend to price in the available information very quickly, even though that information is often limited and, in many cases, incomplete. The result is a significant increase in volatility, with inflation expectations, central bank moves, and risks to energy supply taking center stage in the financial debate.

As is well known, conflicts of this type are recurring and periodically shake up markets. That is why investors should keep several key facts in mind before facing the next one.

What is the main mistake investors make in these situations?

Ismael García Puente, deputy director of Investment Strategy at Mapfre AM, immediately points to the human factor: “The first mistake is overreacting to the news.”

In his view, emotion and urgency often lead investors to make decisions that run counter to their long-term interests. During periods of volatility—and even more so in wartime—the information available at the outset is scarce and fragmented. “We only know the headlines,” García Puente notes, explaining that it becomes extremely difficult to properly assess and position a portfolio amid so much ambiguity. Trying to predict what will happen, when it will happen, and what the final impact on each asset will be is, in his words, “a very complex task and an exercise that has historically produced very little value.”

In light of this, his recommendations are straightforward and centered on discipline: stay calm, avoid hasty decisions, and manage emotions with the support of a financial advisor. Beyond the tactical actions each investor profile may consider, García Puente emphasizes that the best protection comes beforehand: building a well-diversified portfolio capable of absorbing market shocks.

Gold, the U.S. dollar, and bonds (almost) always act as safe-haven assets

When asked which assets tend to serve as a refuge in these situations, García Puente recalls the historical rule: in times of international tension, investors usually turn to gold, the U.S. dollar, and high-quality bonds.

However, the current episode triggered by the war in the Middle East shows some nuances. According to García Puente, in this case only the U.S. dollar has fully played its traditional role.

“In fixed-income markets, rising inflation is pushing interest rates higher. If oil and gas prices remain under pressure, central banks will have less flexibility to cut rates and support economic growth,” the expert explains. In other words, expectations of higher inflation linked to rising energy prices have led to an increase in interest rates, making it harder for bonds to play their defensive role with the same intensity as in previous crises.

As for gold, García Puente notes that its failure to act as a safe haven is probably due to “profit-taking after the spectacular rally seen over the past year and a half.”

What will happen in the Middle East?

On whether we are facing a temporary spike in volatility or a structural shift in the economic cycle, García Puente takes a cautious stance and says the answer will depend on how the conflict evolves.

For now, the consensus view suggests it could be a relatively brief episode—around three to four weeks—but the actual duration will depend on the objectives of the military campaign and specific developments on the ground. To determine whether the crisis could trigger a deeper shift, several key factors must be monitored: the length of the conflict, developments in the Strait of Hormuz, and whether energy infrastructure in Iran or other producing countries in the region is damaged.

Only if there are persistent disruptions to energy supply could mechanisms be triggered that would have a more lasting impact on inflation, interest rates, and economic growth.

“It’s still too early, and we know too little to say with certainty whether the volatility will be temporary or represent a shift in the economic cycle,” García Puente says.

For the time being, Mapfre AM is adopting a more cautious stance by reducing equity exposure and taking advantage of higher interest rates to selectively add duration, provided the conflict does not escalate further. In high-quality corporate debt, no significant contagion has been observed, so the firm continues to view the coupon returns offered by this asset class as attractive.