Israel-Iran conflict: Another proxy war has begun

On June 22, 2025, President Donald Trump authorized a dramatic escalation in the Middle East by ordering direct US military strikes on Iran’s nuclear infrastructure. The operation, conducted in coordination with Israel, targeted three key sites: Fordow, Natanz and Isfahan. While the strikes were hailed by Trump as a “spectacular military success,” the decision has created a series of geopolitical, economic and market risks.

The US is now entangled in two major proxy conflicts: Ukraine and Iran. This dual engagement risks overextending American military and diplomatic bandwidth, especially as both Russia and China loom large in the background. Iran’s formal accession to BRICS (Brazil, Russia, India, China and South Africa) in 2024 added a new layer of complexity, aligning it more closely with Moscow and Beijing in opposition to Western influence.

The US strikes have also increased the likelihood of a broader regional conflagration. Iran has vowed retaliation and its network of regional proxies could target US and allied assets across the Middle East and civilian and military infrastructure in the Gulf. Arab states that have tried to maintain neutrality may find themselves pulled into the conflict, either through direct attacks or political pressure. The risks of miscalculation or escalation are high. 

Perhaps the most immediate economic threat lies in the Strait of Hormuz, the narrow maritime corridor through which nearly 20% of the world’s oil supply flows. Iran has long threatened to disrupt shipping through this vital artery in response to Western aggression and the latest strikes may push Tehran to act. A brief closure of the strait could lead to a noticeable rise in oil prices, potentially reintroducing inflationary pressures just as central banks begin to ease monetary policy. 

At Evelyn Partners we believe in building diverse portfolios which are resilient in the face of changing macroeconomic and geopolitical events.  Our portfolios provide exposure to a diverse range of asset classes, geographies and sectors, including those that can deliver performance in uncertain markets or in a pro-inflationary environment.
 
Within equities, we invest across several sectors including oil and gas stocks, which can provide a natural hedge against rising crude prices. The sector is also attractively valued, trading at around 14 times forward earnings. In 2022, oil and gas stocks re-rated on back of energy supply chain disruption due to the Russian invasion of Ukraine.

Aerospace and defence stocks are likely to be another potential beneficiary, however, we have already seen a re-rating in the sector year to date with governments worldwide ramping up military budgets. Valuations are now somewhat stretched, with the MSCI Aerospace & Defence index trading at a lofty 29 times forward earnings.

Investors often move into sovereign debt as part of a flight to safety on the back of geopolitical risk. Inflation-linked bonds offer a more targeted hedge than conventional government bonds. These instruments adjust payouts based on changes in inflation, which can help support portfolio performance in these scenarios.

Commodities like gold can help reduce portfolio volatility particularly during geopolitical shocks. Gold has historically served as a safe haven in times of conflict and its appeal is likely to grow if tensions escalate further.

The US strike on Iran marks a significant escalation in global geopolitics. What began as a regional conflict between Israel and Iran has now drawn in the world’s most powerful military, raising the stakes. 

When we design portfolios at Evelyn Partners, we carefully review the global outlook, both macroeconomic and geopolitical. We give thought to how portfolios might be impacted by shocks, both known and unknown. Diversification is at the heart of a portfolio’s defence against significant events. Holdings in safe-haven assets, instruments that benefit from inflation pass through and positions that benefit from an oil price rally should help support portfolio performance during this period of uncertainty.