The escalation of military tensions in the Middle East following joint US-Israeli attacks on Iran is prompting pension investors and market participants to monitor risks closely, even as most emphasise the importance of maintaining long-term investment strategies.
Across the pensions and investment industry, the immediate concerns centre on higher oil prices, inflationary pressures and volatility across equity, bond and currency markets. However, asset owners, consultants and asset managers broadly agree that diversification and disciplined strategic allocations remain the primary defence against geopolitical shocks.
While market reactions have included falling equities, rising bond yields and a stronger US dollar, investors stress that the long-term implications will depend largely on the duration and intensity of the conflict and whether disruptions to global energy supplies materialise.
Asset owners: diversified portfolios limit direct exposure
Pension funds say their direct exposure to the Middle East remains limited, with diversified portfolios helping to cushion the immediate impact of geopolitical developments.
The Aargauische Pensionskasse (APK), the Swiss pension fund for employees of the canton of Aargau, has less than 1% of its CHF13.5bn (€14bn) portfolio invested directly in the region. Chief investment officer Adriano Sbriglio said market reactions so far had not required portfolio adjustments.
“Based on market reactions so far, portfolio adjustments haven’t been necessary. We are monitoring developments closely and will react as necessary,” he said, adding that the fund remained committed to its long-term strategic asset allocation.
Similarly, Austrian provider APK Pensionskasse said its direct exposure to the region was small, with equities representing less than 1% of total equity holdings and bonds around 1% of its fixed income portfolio.
CIO Manfred Brenner said the conflict had so far been reflected mainly in stock market declines and renewed US dollar strength, with European equities reacting particularly strongly.
“European stock markets reacted with above-average sensitivity to the escalation in the Middle East, partly due to the higher energy intensity of numerous European sectors, and partly likely due to a temporarily reduced risk appetite of international, especially US, investors regarding foreign investments,” Brenner said.
The market movements affected APK’s portfolios because of an existing overweight position in European equities, although the fund had mitigated some of the negative impact through hedging measures.
Dutch pension giant ABP also said its investment approach was designed to withstand market volatility.
“We use stress scenarios to incorporate the risk of sudden shocks in our investment approach. Our robust investment framework is diversified across regions, sectors and asset classes and is regularly rebalanced back to strategic weights,” the fund said in a statement.
“At this moment, we see no reason to adjust our long-term strategy. The situation in the Middle East is complex and volatile, and we are prepared to make adjustments when warranted.”
UK schemes echoed similar sentiments. NEST said it was maintaining a “watching brief” on developments but was not currently planning changes to its investment strategy, while Universities Superannuation Scheme (USS) highlighted the resilience of its globally diversified portfolio and its ability to withstand significant shocks.
Consultants: inflation and funding risks under scrutiny
Consultants in the DACH region say pension schemes should remain cautious but avoid making reactive decisions in response to short-term volatility.
Nikolaus Schmidt-Narischkin, managing director of investments at WTW Germany, said pension investors in the country – including regulated IORPs and corporate pension vehicles – generally maintained diversified portfolios.
German pension investors invest in the Middle East mainly through emerging market equity allocations, which typically include countries such as Saudi Arabia, the United Arab Emirates, Qatar and Kuwait. However, their share in broad emerging market mandates is relatively small, usually between 6% and 8%.
The portfolios of German pension investors, which collectively manage around €564bn in assets, therefore remain broadly resilient, he said.
WTW expects the immediate impact of the conflict to be felt primarily in global equity markets and oil prices.
“We anticipate that markets will remain volatile and react to developments. The long-term impact depends on the duration and outcome of the conflict and is therefore subject to considerable uncertainty,” Schmidt-Narischkin said.
Mercer warned that potential disruption to the Strait of Hormuz – a key global oil route – could intensify inflation pressures and influence central bank policy.
Jeffrey Dissmann, head of investment at Mercer Germany, said higher oil prices and tighter monetary conditions could affect pension portfolios, particularly fixed income allocations that represent a large share of many schemes’ assets.
“This directly impacts fixed income portfolios, which represent a large share of German pension assets, and may reduce real returns,” he said.
Market volatility could also affect funding ratios. Higher discount rates may temporarily reduce liabilities, but sharp asset price movements could increase the risk of underfunding.
Mercer said pension investors should review scenario analyses and risk assessments to better understand potential outcomes.
“If structurally higher inflation were to prevail, investors should review whether their current exposure to inflation-sensitive asset classes is still appropriate,” Dissmann said.
Barry Jones, CIO at consultancy Isio, said movements in long-dated government bond yields were particularly relevant for UK pension schemes, given their reliance on liability-driven investment (LDI) strategies.
While the LDI framework has become more robust since the market turmoil of 2022, he warned that sharp yield movements combined with weakness in credit assets used as collateral could still create liquidity pressures.
“At this stage, the priority for trustees is resilience – ensuring portfolios are structured to withstand a range of outcomes while avoiding reactive changes based on short-term developments,” Jones said.
Asset managers: oil price and growth outlook key variables
Asset managers say the conflict’s impact on financial markets will largely depend on developments in energy markets and the stability of global supply routes.
Storebrand Asset Management’s allocation team said the sharp rise in oil and gas prices following the US attack on Iran had prompted it to downgrade global equities from overweight to neutral.
Olav Chen, head of allocation and global fixed income at the Norwegian manager, said a prolonged conflict could weaken growth prospects while pushing inflation expectations higher.
“If the conflict becomes prolonged, it will weigh on global growth prospects while pushing inflation expectations higher. This is where the main uncertainty currently lies,” he said.
Brent crude prices have risen to around $87.50 a barrel amid heightened geopolitical tensions and concerns about shipping through the Strait of Hormuz, a key route for global oil exports.
Despite the shift in its global equity stance, Storebrand said it maintained overweight positions in Swedish and Norwegian equities, emerging markets and credit and corporate bonds.
Other asset managers highlighted that energy supply disruptions represent the main transmission channel through which geopolitical tensions could affect markets.
According to Ninety One’s Investment Institute, the possibility of disruptions to the Strait of Hormuz – through which roughly one-fifth of global oil supply passes – remains a low-probability but high-impact risk.
A sustained rise in oil prices could have stagflationary effects, lifting inflation while slowing economic growth, the firm said.
MFS Investment Management also warned that risky assets could come under pressure in the near term, although history suggests geopolitical events rarely cause lasting equity weakness unless they disrupt economic fundamentals.
The key variables for markets include whether energy infrastructure is targeted, whether shipping through the Strait of Hormuz is significantly disrupted and how long uncertainty persists.
In the absence of sustained energy supply shocks, many investors expect markets to ultimately absorb the geopolitical tension.
For now, industry participants say the most prudent course remains maintaining diversified portfolios and focusing on long-term investment objectives rather than reacting to short-term market movements.
