What can investors do when markets are unstable due to the Iranian crisis?

Although the Iranian crisis's future is uncertain, investors should anticipate a more unstable global environment

Because the Iranian crisis is constantly changing, it is difficult to predict how it will affect markets. As demonstrated by Monday's near-£30 swings in the price of oil, anything could have happened by Friday. I write this on Wednesday.

It makes sense to assume that energy prices will return once the Iranian crisis has passed. For at least a few decades, the unrest in the Middle East has followed this pattern. In that instance, worrying about transient fluctuations is not very beneficial. Investors have been in agreement about this for the majority of the past two weeks. With a few exceptions, like the recent decline in Korea, markets have been considerably calmer than you might expect. Stocks have not yet been in a panic, so disregard the exaggerated headlines about "tumbling" and "plummeting" on declines of about 3%.

However, there are instances (such as Russia's invasion of Ukraine and, in fact, a number of earlier events in the Middle East) where the effects did not quickly fade. In the short run, that situation benefits US markets and the US dollar more than the majority of the rest of the world. Because it is a net oil exporter, the US has more energy security, and high prices will motivate shale oil producers to increase output. Markets are already showing this: US stocks are doing better and the dollar is marginally stronger.

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Start your trial with that in mind. Paul Niven of FandC Investment Trust (LSE: FCIT) notes that although non-US stocks outperformed the US last year, earnings only met expectations in the US. Investors in European shares are eager to witness growth. The longer the crisis lasts, the less probable that is and the greater the potential for market losses.

A price chart for Brent crude oil.

There are three reasons to worry that the Iranian crisis will turn into a protracted conflict.

The obvious reason for optimism is that very few people will gain from a protracted disruption to oil exports. However, the three main participants might feel differently if you're a pessimist. Iran may be motivated to cause as much disruption as possible this time since it will appear much more expensive to attack it in the future. Israel may wish to keep going until Iran's military capabilities are destroyed and its government is overthrown.

A protracted crisis that keeps oil prices high is not beneficial to the US, but it appears that it initiated this conflict without a clear strategy for resolving it. Donald Trump's remarks that the attack was "pretty much over" were interpreted by markets as comforting, but perhaps they should have been alarmed by obvious indications of an unstable president who did not appear to be in control of the facts.

As a result, the result is uncertain. All we can say is that it appears that the world is becoming more unstable. Financial shocks have always occurredas the saying goes, "markets climb a wall of worry"but the main distinction nowadays is that the geopolitical environment in which we invest is becoming less stable. One important consequence of this is that supply chains will be more susceptible to disruption, making inflation more erratic. Real assets with pricing power and inflation protection will become more crucial.