Markets are nonplussed by Israel-Iran. Here's why.

Today I am expanding on last week’s post about the search for new safe havens for investors, as U.S. Treasuries and the dollar gradually lose that status amid U.S. policy volatility and fiscal profligacy. Markets have remained remarkably calm this week amid the ongoing Israel-Iran hostilities and ongoing uncertainty around tariffs and the war in Ukraine. All these risk cross-currents sharply reduce the opportunity set for investors looking for cover.

Navigating geopolitics is one of the trickiest aspects of risk mitigation, as fundamentals don’t play much of a role. I strongly doubt anyone who claims to know what Trump is going to do, partly because he probably hasn’t made up his mind yet. He has said as much himself, claiming - in response to questions about intervening in Iran - that he prefers to leave decisions to the last-possible minute when the situation is fluid.

While taking out Iran’s nuclear infrastructure is likely tempting for the administration, the President will also have to consider the risk of alienating his MAGA base by breaking his “no new wars” campaign promise. There is also the widely-reported fact that Trump apparently has little trust in Netanyahu. Iran and Israel have so far both avoided striking oil infrastructure.

So it is understandable that markets have essentially taken a “wait-and-see” attitude to the situation. Oil has spiked to $77 per barrel, up from $65 a week ago. But this is a moderate jump, and the price remains below where it was a year ago and at the beginning of 2025. Volatility also remains contained. Moreover, Iran and Israel traded strikes in April and October 2024, and the rises in Brent and VIX were contained. Although Israel has escalated the conflict seriously, market-calming solutions are still well-within the range of plausible outcomes.

The real danger

If anything, the Israel-Iran hostilities may end up being a distraction from more pernicious risks to investors. One of these is of course trade policy. Many investors are seeking to reduce their U.S. allocations but, in so doing, face a number of challenges in identifying investment opportunities with low U.S. exposure and low geopolitical risk.

Within EM, Latin America is best-insulated from the wild geopolitics of Eurasia but in many cases has tight trade links to the U.S. Geopolitical risk is of course heightened in the Middle East and North Africa region is of course, and this is compounded to an extent by tight diplomatic and economic links with the U.S. for some countries. Yet it is still an open question how salient the situation in Iran will be for MENA investors. We can apply similar reasoning to some Asian countries.

Looking at the data for U.S. trade exposure in 2024, certain economies in the Western Hemisphere, Asia, and Europe are most exposed. In EM, goods exports to the U.S. from Kazakhstan, Romania, Egypt, Algeria, Argentina, Saudi Arabia, Turkey, UAE, Poland, Pakistan, Bangladesh, Indonesia, Brazil, India, the Czech Republic, and South Africa account for less than 2.5% of GDP in each of those countries.

Over the coming weeks, I’ll be looking at other factors such as demographics, beta, commodities, secular trends, sectoral dynamics, and other criteria to identify where investors are most likely to find shelter in these stormy waters.

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