How Should Investors React to the Iran Crisis?

Earlier this week, a flurry of diplomatic activity produced a tentative ceasefire between Iran, Israel and the United States. It is unclear whether this is just a pause, or a step towards a lasting peace. My heart wants to be optimistic, but my head is telling me to expect further escalation. The geopolitical factors which produced the conflict are deep and protracted. The US has their 15-point peace plan. The Iranians have a 10-point plan. By my maths, that’s 25 points of disagreement... although I could be wrong.

If fighting resumes, it is worth remembering that many countries were already staring into the economic abyss. Governments in Sri Lanka and Slovenia limited fuel and energy use, with quotas per vehicle and electricity rationing. I had a strange sense of déjà vu, of 2020, when I watched a wave of Covid surge through China and Italy, before eventually washing over the world like a tsunami. When the Iran conflict started, I wondered how long it would take before the crisis hit the UK.

The Iran crisis was playing out like a repeat of 1973, when the Yom-Kippur war resulted in high energy prices, fuel shortages and power cuts. Wage disputes and industrial action exacerbated the situation. Businesses ran on a 3-day week. Televisions cut off at 10:30 pm.

I’m not claiming to have a crystal ball, but it’s clear that we are not out of the woods yet. Israel, the US and Iran were fighting each other back in June. This could just be another opportunity to regroup, reassess and rearm. 

If fighting starts again, economic risks abound. A large proportion of the world’s oil, gas and fertiliser passes through the Strait of Hormuz. The war could easily spill over into a wider macroeconomic crisis, with inflationary pressures, rising interest rates and (who knows?) a potential debt crisis.

Here are just two scenarios that could push bond yields up, making equities less attractive.

• High oil prices could force energy importers like Japan to sell US Treasuries - i.e. to raise cash for expensive oil.

• The closure of the Hormuz Strait could dry up oil revenues for Gulf economies, which would in turn be unable to deploy petrodollars into US securities.

This is all scary stuff, but at the same time, history suggests that the best opportunities arise when the sky is supposedly falling.

Buying quality on the cheap

The perfect storm can provide the perfect opportunity to buy quality merchandise that has been marked down. I'm thinking about enduring brands that we hold for years, where strong margins and consistent demand cause the share price to compound higher and higher, year after year, decade after decade. These companies include:

• Procter & Gamble (NYQ:PG), which owns brands like Pantene, Gillette and Venus;
• Reckitt Benckiser (LON:RKT), which owns brands like Dettol, Durex and Nurofen;
• Heineken (AMS:HEIA), which owns a well known lager.

Demand for these products could expand, regardless of economic conditions. For instance, Warren Buffett invested in Gillette on the basis that 'millions of men’s faces' were growing hair while he slept... and they would all need to shave in the morning.

The issue with these high-quality companies is that they rarely trade at low valuations. However, during the Iran war, some of them traded on a 4% dividend yield.

During the crisis, my plan was to gradually ‘drip feed’ into the dividend aristocrats. I did NOT try to time the market, or invest according to a schedule. Instead, I planned to invest when specific criteria were met. If I could secure a 4% dividend, I would take that as a win. With dividends reinvested over decades, positions could double or triple from income alone. My plan was to buy and hold… rather than buy the dip and get out when the crisis ended.

I was able to buy Nestle (SWX:NESN), Reckitt Benckiser (LON:RKT) and Unilever (LON:ULVR). The other companies remain on my watchlist. If there is another crisis, the European and US blue chips may become attractive. In the absence of another crisis, I will be preparing for the next crisis, doing my due diligence with a particular focus on: a) profit margins, b) returns on capital/equity, and c) the companies’ portfolio of brands.

My investment thesis assumes that dividends will not be cut. Therefore, we want earnings and cashflows to be higher than the dividend.

Cyclical Stocks: Quick Gains or Long-Term Winners?

Perhaps the most attractive opportunities exist around cyclical stocks. These are companies whose performance swings with the economic cycle - i.e. revenues and profits surge during booms, but fall sharply during downturns.

Think house builders like Berkeley Group (LON:BKG), Persimmon (LON:PSN) and Taylor Wimpey (LON:TW). Rising energy prices could push up inflation, bond yields, and interest rates. This would increase mortgage costs and weaken the housing market.

House builders usually recover when a crisis ends. On the morning after the Iran ceasefire, house builders rose sharply, by 9% (Persimmon) and 7% (Taylor Wimpey and Berkeley Group). This leaves investors with a choice. One approach is to play the short-term game - i.e. assume that market wobbles are just wobbles - temporary volatility without broader economic consequences. Investors could buy the dip and turn a quick profit when the crisis ends.

The problem with this strategy is that you are effectively at the whims of Trump’s Twitter account, constantly wondering “will he, won’t he?”… buying when he says, “They want to make a DEAL!!!”… selling when you realise they don’t. Good luck with all that!

Perhaps it is better to play the long game - i.e. wait for financial reports, profit warnings and broker downgrades to confirm that there is actually a crisis. Investors can better judge whether a crisis is real, or fleeting, by focusing on revenues and profits, rather than doomscrolling and following the news cycle.

Furthermore, by playing the long game, investors do not need to perfectly time the market bottom. We can get hurt if we buy after a price drop, only to see the price fall further. It is easier to ride the recovery wave, because recoveries often take their time to play out. 

Good news will take hold incrementally and slowly, because expectations are 'anchored' to a prior period of poor performance. Investors can therefore afford to miss the bottom and wait for prices to start ticking up again.

At the individual stock level, a recovery will often show up in several ways:

• Brokers become more optimistic and raise their earnings forecasts gradually, over time;
• Trading statements become increasingly bullish, slowly but surely;
• This shift in sentiment will be backed by stronger revenues and profits.

Handling the Oil Spike

The other interesting play is, of course, oil, which surged during the Iran crisis. The upward trend could resume - or even accelerate - if the Strait of Hormuz is closed again, or if energy infrastructure is damaged in another round of fighting.

I have not invested in oil ETFs or stocks yet, but if Brent or WTI prices fall back to pre-crisis levels, I may consider going long. This could help cushion my portfolio against an energy shock, as oil stocks often rise even when energy dependent securities, like airlines, decline.

Investors can gain exposure through oil stocks (e.g. BP) or oil ETFs (e.g. United States Oil Fund). These generally move in line with underlying oil prices.

Gold: A Hedge Against Geopolitical Risk?

Another interesting macro play is gold. The long-run case for gold is rooted in the idea that China and other emerging powers are keen to establish a financial system based, not on the dollar, but instead on a multi-currency or commodity-backed reserve framework, with gold as a key anchor.

The Iran crisis could in theory accelerate this trend for two reasons:

• First, because America’s aggressive foreign policy and frequent use of sanctions give emerging markets an incentive to reduce reliance on the dollar system, lowering their vulnerability to economic coercion;

• Second, high oil prices could trigger a vicious cycle in the US, where inflation rises, interest rates climb, the debt burden grows, the Fed prints money to keep the system running, creating more inflation, etc - the end result potentially being dollar devaluation.

Within this context, gold becomes are more attractive store of value. Investors can gain exposure via several options:

• Gold ETFs, like iShares Physical Metals (LON:SGLN);

• High quality companies in the metals and mining industry. Quality stocks are profitable, cash generative companies with a strong set of financial statements. Royalty and streaming companies fall into this category; they provide upfront capital to miners in exchange for a share of future revenue or production. They don’t operate the mines themselves. As such, they bypass capital-intensive activities while securing a steady, predictable cash stream.

In the royalty and streaming space, I have recently bought Royal Gold (NSQ:RGLD), Triple Flag (NYQ:TFPM), Franco-Nevada (NYQ:FNV) and Wheaton Precious Metals (LON:WPM), alongside iShares Physical Metals.

It is also worth noting that all the royalty and streaming companies I mentioned are High Flyers, according to our StockRank Style system. They exhibit strong momentum, boosted by the recent gold bull run. They are also high-quality, thanks to their profitable, capital-light, and cash-generative business model.

Other themes to consider

• Defence stocks: Geopolitical tension and conflict often boost demand for military equipment and services. Companies like BAE Systems and Rolls-Royce benefit from government contracts and increased defence spending. US companies like Lockheed Martin and RTX could benefit from the same trend.

• Volatility plays: Some companies actually benefit when markets wobble. Stockbrokers and spread-betting firms—like AJ Bell, IG Group, Plus500, and CMC Markets—see higher trading volumes and client activity during periods of market turbulence.

• Alternative energy: Surging oil prices can push capital into renewables, hydrogen, and nuclear as investors and governments look for more stable, long-term energy sources. Companies and ETFs in these sectors may not spike overnight, but may gain over the medium term.

Bringing it all together

No-one knows what will happen next. This morning, Trump probably woke up wondering: Is the war over? 

The Iranian and US negotiating positions are miles apart. Furthermore, Israel and the Gulf states will have a strong vote on a final settlement. At the same time, it is hopefully clear to both sides that war is not a cost-free option. For the US, the war could evolve into a Vietnam-esque quagmire, in an economically sensitive region. For Iran, the war will only result in more death and destruction. A Vietnam-style ‘victory’ could just be a Pyrrhic victory.

At some point, cool heads must prevail, but until then… what can investors do? I plan to build a stockpile of cash. That is not an investment per se, but cash will provide room to maneuver if an investment opportunity arises. The second thing I am making is a watchlist, of two types of companies: first, good quality companies like Coca-Cola, which are typically expensive, but may become cheap during a crisis; second, cyclical companies, which become more volatile during a crisis and can be bought on the dip. Now is the right time to research these companies, calmly and carefully, without the worry of a bear market or, worse, a war.

I mentioned that I had bought some gold stocks and ETFs (see above). I still hold these and view gold as a long-term macroeconomic play. I have not purchased oil stocks or oil ETFs, though I am monitoring both the situation and the prices of Brent and WTI. If oil falls within a specific range, I may consider it as a hedge against renewed violence.

I’d be curious to hear from others who have navigated bear markets or periods of geopolitical tension—what strategies worked for you, and what lessons did you learn?

Disclaimer: I own Royal Gold (NSQ:RGLD), Triple Flag (NYQ:TFPM), Franco-Nevada (NYQ:FNV), Wheaton Precious Metals (LON:WPM), iShares Physical Metals (LON:SGLN), Nestle (SWX:NESN), Reckitt Benckiser (LON:RKT) and Unilever (LON:ULVR).