On Japan, Bogdanova thinks equities will remain under pressure if the conflict drags on. Japan is a net oil importer – more than 90 per cent of its imported crude comes from the Middle East, more than 60 per cent of its oil imports pass through the Strait of Hormuz, and it also depends on the Middle East for liquefied natural gas and naphtha. Japan has 250 days’ worth of oil reserves as of the end of 2025.

The Bank of Japan (BoJ) Governor Kazuo Ueda has warned that the situation could affect the domestic economy and inflation. Industries most vulnerable to a prolonged Middle East conflict include banking and financial services, airlines and transportation, shipping, energy-intensive manufacturing, oil refiners and petrochemicals, and electronics and export-oriented industries. If the conflict drags on, she believes Japanese equities will remain under pressure. She thinks the yen could remain weak given that Japan has to import more expensive oil, which is an unfavourable supply-side price pressure. Higher oil prices could also affect the timing of the next BoJ rate hike.

US market
Bogdanova believes that it is prudent for investors to assume that military and geopolitical risks can push the US equity market into a temporary 5 per cent to 10 per cent pullback or, in rarer cases, a longer-lasting correction of greater magnitude. Also, with the S&P 500 near its all-time high, such selloffs need to be put into perspective. While the average 6 per cent decline of the past 20 episodes should not be dismissed, it is well within the bounds of a typical, modest pullback in many scenarios that often confront markets – including those that have nothing to do with military clashes.

Bogdanova recommends maintaining US equities at the market weight level (long-term strategic allocation level) in portfolios as long as indicators are signalling that the US economic expansion should persist, and S&P 500 profit growth is not materially threatened. However, she is mindful that this Middle East crisis is highly fluid and unpredictable, and events could escalate further. She thinks it is prudent to expect and plan for some potentially unnerving market volatility this year.

Meanwhile, Haefele, believes that one of the most effective ways of dealing with a more polarised geopolitical environment – which creates a wider range of potential risk scenarios – is to increase asset class and regional diversification.

“Adequate exposure to quality fixed income and alternatives such as hedge funds can help reduce portfolio volatility and limit the impact of shocks. Investors should, of course, assess their ability and willingness to manage risks related to alternative investments,” Haefele said. He sees further upside for broad commodities in 2026, driven primarily by his positive outlook for metals. The fast-moving nature of events in the Middle East increases the appeal of actively managed commodity strategies in his view, given increased intra-commodity market volatility. “We also believe a modest allocation to gold, of up to a mid-single-digit percentage of total assets, can enhance diversification and buffer against geopolitical risks,” Haefele added.