Why war doesn’t mean a bad spell for UK stocks

We recently suggested that it’s best to suppress your natural impulses whenever markets go into a tailspin. But, understandably, investors may have become a little skittish when oil and gas prices went into orbit as several major Middle Eastern energy exporters declared force majeure on oil and liquid natural gas (LNG) shipments, and attacks on energy infrastructure continued.

Most people seem to appreciate the inverse correlation between energy prices and economic growth rates, even if the relationship appears to be lost on the UK government. But beyond the threat to global energy supplies, the conflict in Iran could have a major bearing on capital flows.

Indeed, that already appears to be the case. The MSCI Emerging Market index has fallen by 7.2 per cent since “Operation Epic Fury” kicked into gear, although it remains well in advance of its 200-day moving average. Asian markets fared worse than most, not least because regional economies rely heavily on energy shipments from the Middle East (a proposed oil pipeline from Gwadar in Pakistan to Xinjiang has faced logistical challenges in recent years, but China may yet revisit this plan in light of recent events).

Once you’ve lived through a few of these geopolitical jolts to the system, you come to realise that there’s always a reflexive element at play, yet market sentiment will solidify if events in the Strait of Hormuz trigger a prolonged economic slowdown.

The standard assumption is that investors will reduce exposure to equities in expectation of increased volatility and/or downward pressure on earnings, with capital reallocated towards cash, the US dollar and less risky risk assets. This is the reason market tumult weighs more heavily on small caps and Aim stocks.

There’s also the danger that if energy prices remain elevated they will reignite inflationary pressures, assuming they had been doused in the first place. That means higher interest rates for longer, the reverse of trader positions at the start of the year. If central banks choose to ratchet up base rates, existing bonds would become less attractive compared with new bonds offering higher yields, with all the attendant implications for equities.

Even if we find ourselves amid a liquidity squeeze, there is reason to believe that FTSE 100 exposure mightn’t be the worst option available, considering that the index is deemed a more defensive play compared with many of its more growth-oriented rivals.

It may be, however, that shipping disruptions could have a major bearing this time around given the weighting ascribed to the energy sector on the UK benchmark, ranging from 9.5 to 10.75 per cent in recent years. It’s worrying that BP (BP.) derives a significant proportion of its output from the United Arab Emirates and Iraq, while Shell (SHEL) is exposed through its Pearl gas-to-liquids plant in Qatar.

If sentiment does sour towards UK equities because of the current crisis, it will be at odds with prevailing attitudes, at least according to findings from the Berenberg investor barometer, described by the venerable merchant bank as the “first iteration of a new pulse on global investor sentiment towards the UK”.

Berenberg surveyed more than 400 global investors, representing over £790bn in assets under management. The findings are pleasantly upbeat, suggesting that the UK is “firmly back on the radar for global investors”. But it needs to be noted that the responses were collated before Uncle Sam let slip the dogs of war.

With this caveat in mind, it’s still encouraging that 38 per cent of investors said they were planning to increase their UK equity exposure over the next 12 months, while half the respondents believe that UK public companies will beat earnings expectations over the period. The same proportion warned that government mis-steps and political uncertainty remain the top risks to UK GDP, a viewpoint that would garner widespread domestic support.

There was even glad tidings on the admissions front, with 63 per cent of investors expecting IPO numbers to rise through 2026 following years of sluggish activity. That aligns with the noticeable increase we witnessed in the late stages of 2025, with momentum maintained early this year.

The promise of further regulatory reforms, changes to listing rules and incentives such as temporary stamp duty relief may well be combining to reinvigorate UK admissions, but capital flows into the domestic market have undoubtedly benefited from the relative rotation out of US equities as concerns over concentration risk and tariff uncertainty mount. Ultimately, though, both the primary and secondary markets in UK shares will thrive if the government reverses the situation in which UK adults hold far less of their wealth in investments compared with other G7 economies.