Navigating Geopolitical Risks in Equity Markets: The Middle East Conflict and Its Implications for European Investors

The Middle East is engulfed in escalating tensions, yet European equity markets remain stubbornly resilient. While U.S.-Iran hostilities threaten oil supplies and global stability, the Stoxx 600 index has shown only modest dips, buoyed by central bank policies and corporate earnings strength. This divergence between geopolitical turmoil and market calm presents a paradox for investors. To navigate this landscape, European investors must adopt a dual strategy: hedging against short-term risks while capitalizing on underpriced opportunities in sectors insulated from conflict and inflation.

### The Geopolitical Landscape: A Powder Keg, but Not Yet Exploding
The recent U.S. airstrikes targeting Iran's nuclear facilities and Iran's retaliatory missile launches have not yet triggered a full-scale crisis. While oil prices spiked to $79/barrel—driven by fears of a Strait of Hormuz blockade—the geopolitical premium remains contained at $5/barrel. Analysts caution that neither side can afford all-out war, given Iran's reliance on Hormuz for exports and Israel's military dominance.

However, the risks are real.

underscores its strategic importance. A prolonged conflict could push oil to $130/barrel, reigniting inflation and derailing central bank rate-cut expectations. For now, the International Energy Agency's report of a 105 mb/d global supply and slowing demand growth (720 kb/d in 2025) keeps a lid on prices.

### European Equities: Resilient, but Fragile
European markets have shown remarkable resilience. The Stoxx 600 is within 1.5% of its all-time high, while defensive sectors like utilities and consumer staples have outperformed. Yet, this calm masks vulnerabilities:
- Trade Policy Uncertainty: Eurozone GDP growth is projected to fall to 0.9% in 2025 due to U.S. tariffs and geopolitical risks. A worst-case scenario—where tariffs rise to 28%—could slash growth to 0.5% next year.
- Inflation Lingering in Services: While headline inflation is near 2%, services inflation remains elevated, complicating central banks' paths.



### Strategic Adjustments for European Portfolios
To navigate this environment, investors must balance risk mitigation and growth opportunities. Here's how:

#### 1. Hedge with Defensive Assets
- Utilities: European utilities like NextEra Energy (NEE) and EDP Renováveis (EDPR) offer stable dividends and low correlation to energy price swings.
- Consumer Staples: Firms like Procter & Gamble (PG) and Unilever (UL) are insulated from geopolitical shocks and benefit from inflation-linked pricing power.

#### 2. Invest in Geopolitical Winners
- Defense Contractors: Middle East tensions are driving demand for security infrastructure. Israeli firms like Elbit Systems (ESLT.TA) (+27% YTD) and Rafael Advanced Defense (RALS.TA) are prime picks, backed by U.S. contracts and regional stability deals.
- European Infrastructure Plays: Germany's infrastructure spending and EU single-market reforms favor firms like BASF (BAS) and Siemens Energy (SIE), which benefit from energy transition and defense-related projects.

#### 3. Avoid Overexposure to Tariff-Exposed Sectors
Eurozone exporters like automakers (Volkswagen (VOW)) and luxury brands (LVMH (MC)) face headwinds from U.S. tariffs and a stronger euro. Investors should prioritize domestically focused firms or those with pricing power.

#### 4. Leverage Safe Havens Strategically
- Gold: While gold fell slightly in June, it remains up 31% YTD. ETFs like SPDR Gold Shares (GLD) offer a hedge against inflation and conflict-driven uncertainty.
- U.S. Treasuries: Despite low yields, their demand remains robust.

### Conclusion: Stay Disciplined, Stay Diversified
European investors face a precarious balance: markets are calm, but risks are rising. A disciplined approach—pairing safe havens with resilient equities like defense contractors and utilities—can mitigate downside while capturing growth. Avoid overexposure to tariff-sensitive sectors and monitor Middle East developments closely. The geopolitical premium may fade, but the structural shift toward energy and defense spending is here to stay.

In this volatile landscape, the mantra remains: protect capital first, grow second.