Known Unknowns returns

13 March 2026

Markets shake but don’t break
Markets were thrown out of alignment by the geopolitical events this week. European natural gas prices nearly doubled at the start of the week, reversing a year-long downward trend. European stocks were hit much harder than the US, after months of outperformance. The dollar spiked against global currencies, after sustained weakness. The biggest price action came in Korea: its stock market sold off around 20% on Monday and Tuesday, before recovering 12% on Thursday. Incredibly, Korea’s market is still up around 30% since the start of 2026.

East Asia is particularly at risk, due to its dependence on oil and gas imports. Korean volatility also shows how assets favoured by speculative leveraged traders (i.e. hedge funds) are the most vulnerable. We suspect a similar dynamic explains the large rise in UK bond yields (as discussed in a separate article).

All things considered, the aggregate global equity market reaction was not as bad as historical precedent would have suggested. Europe and Asia came under the most pressure. The UK’s FTSE 100 held up a bit better, due to its high proportion of energy companies. The sell-off seems like a shake-out of speculative positions in the previously profitable “cyclical versus tech” trade (value versus growth). Investors worried about AI disruption may have bought the Magnificent Seven tech stocks (rediscovering their ‘quality growth’ characteristic), which rose 2% in sterling terms.

Perhaps markets have, in general, become desensitised to repeated shocks. The last global oil and gas shock came in 2022, and it did not destroy the world economy. Oil and gas prices have not spiked as high as they did after Russia invaded Ukraine but, even if they do, plenty of investors would back the world economy to overcome them.

The war’s known unknowns
We do not think the risks should be ignored. There are ‘known unknowns’ about the length, outcome and collateral damage from the Iran war, the most obvious oil’s inflation impact. We write about that separately, but the chart below (from Societe Generale Economics and Cross Asset Research) shows some projections for global growth and inflation. They look at temporary rises over different periods, and a permanent (longer than four years) impact scenario:

Consumer prices are projected higher everywhere, but global growth is barely affected, falling initially, then reversing before settling at a lower trend. More importantly, growth will differ regionally. The US, now a net oil and gas exporter, might actually benefit, at least in the short-term. Asia is hit hardest, followed by Europe.

Investors worry about the short-term, but also about the possible end states. Is this a regime shift (like Venezuela), a regime replacement (like Iraq) or an future failed state (like Libya)? Trump seemingly prefers a short war. Judging by the apparent lack of military preparedness, he may have only wanted sabre-rattling in the first place. But wanting to keep it brief does not mean he will.

There is some suggestion that the Venezuela and Iran attacks are part of a broader hawkish strategy to starve China of energy supplies. We think that is unlikely (the US has offered to protect tankers through the Strait of Hormuz, more of which are bound for Asia than the US) but, again, that does not mean things cannot escalate in that direction.

Then there is the disruption along the way. Markets are understandably focussed on oil and gas, but all sorts of trade ships through the Persian Gulf. The world has only just recovered from years of supply chain problems – and now another shipping crisis could be upon us.

Markets are distracted but the economy keeps going
The irony is that the war has distracted markets from their other worries. Just last week, everyone was panicking about AI destroying the software industry and a potential run on private credit firms. Those themes have not gone away, but few are talking about them anymore. Neither are markets focussed on Trump trying to reimpose tariffs after the Supreme Court loss, when that could equally disrupt global supply chains.

In many respects, the world economy has been humming in the background. Until recently, 2026 growth indicators rose as high as 2% for the combined economies of Europe, North America and Australasia – up from 1.6% in 2025.

This week, at the National People’s Congress, China set a 4.5%-5% growth target for 2026. While this is the lowest target since 1991 (a recognition of its economic challenges), its population will benefit from Beijing re-emphasising domestic demand. This will also boost the rest of the world, particularly its near-neighbours in Asia.

In the UK, the chancellor’s spring statement barely registered as news – partly because it did not contain anything new, but mainly because it rapidly became irrelevant. Rachel Reeves spoke about lower inflation, lower debt and improving growth – and she was not wrong – but all of those are now in doubt.

Investors were ambivalent to economic data even before the war, but many components have improved. Business confidence surveys were better than expected in the US and Europe. US employment data was improving, but then February’s data, released today, strongly disappointed. The non-farm payroll dropped 92,000 thanks to the strike and weather, however, layoffs do not seem to be AI-related, judging by tech and service job data.

If things do calm down, markets could easily turn positive. Investors that sell out of short-term panic often miss out on the broad recovery that follows. In uncertain times, we always emphasise the importance of ‘time in the market’ over ‘timing the market’.

Please note:

Data used within the Personal Finance Compass is sourced from Bloomberg/FactSet and is only valid for the publication date of this document. The value of your investments can go down as well as up and you may get back less than you originally invested.