The Middle East – Navigating the Geopolitical Fog

The recent escalation in the Middle East has predictably triggered a bout of “risk-off” sentiment across global markets. Markets often react quickly to geopolitical headlines, but history suggests that the economic and market consequences are frequently less lasting than initially feared. While the humanitarian toll is deeply concerning and the headlines unsettling, our base case remains one of fading geopolitical news.

Continuity Over Chaos

Speculation around scenarios such as the fragmentation of Iran or rapid political liberalisation appears overstated. A complete breakup of the country is, in our view, a tail risk with extremely low probability, and a swift transition to a democratic system seems equally unlikely in the near term.

If political change does occur, it is more likely to resemble an internal reshuffle of leadership rather than a transformation of the system, a “change of jockeys rather than a change of horse.” At present, however, there is little concrete evidence of such a shift. The defining feature of the current moment remains the fog of war, with information incomplete and speculation abundant.

The GCC: Stability Remains the Base Case

Recent commentary has questioned whether the Gulf Cooperation Council (GCC) can maintain its reputation as a stable financial hub. We assign a zero probability to such concerns.

The Gulf states retain strong institutional frameworks, substantial financial reserves, and a strategic commitment to economic diversification, all of which provide meaningful buffers against geopolitical shocks.

A Volatility Divide: US vs Asia

One of the most striking features of the recent sell-off is the geographic divergence in volatility. While the US VIX briefly approached the high-20s during the latest escalation, Asian volatility indices have surged significantly higher. This disparity reflects Asia’s greater exposure to Gulf energy flows, as disruptions to the Strait of Hormuz could affect a large share of oil and LNG exports destined for Asian economies. For investors, this divergence may represent an opportunity rather than simply a warning signal.

Korea: A Compelling “Buy the Dip” Opportunity

The sharp rise in Korean market volatility appears disconnected from the domestic fundamentals. Three powerful structural drivers continue to underpin the investment case:

• The semiconductor super-cycle: Global demand for AI infrastructure and advanced chips remains strong and is unlikely to be materially affected by a regional geopolitical flare-up.
• Earnings momentum: Corporate profitability across key sectors continues to trend upward.
• Shareholder reforms: Government initiatives such as the Value-Up programme aim to address the long-standing “Korea Discount” and improve corporate governance.

None of these structural drivers have changed. The recent weakness in Korean equities largely reflects concerns about potential energy supply disruptions rather than deterioration in the country’s economic outlook.

Gold Miners and Liquidity Selling

An interesting dynamic during the sell-off has been the behaviour of gold mining equities. Despite gold prices holding relatively firm, consistent with its traditional role as a safe-haven asset during geopolitical stress, gold miners declined. This reflects their equity beta, which often causes them to fall alongside broader equity markets during periods of forced liquidation.
Having entered the episode with strong momentum, mining stocks became an easy source of liquidity for investors seeking to raise cash during the initial wave of panic selling.

The Bottom Line

Markets are currently pricing in “worst-case” scenarios that we simply do not view as likely. Amidst the indiscriminate selling of high-quality assets caught in the crossfire we are looking for early birthday presents. We are using this volatility to build positions in companies where the market has overreacted and left excellent value on the table. Rather than reacting emotionally to volatility, we remain disciplined and focused on fundamentals.

Professional investors only.

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Sources: JOHCM/FTSE International/Bloomberg (unless otherwise stated)