What the war in the Middle East means for your money

Market volatility is unnerving – the best investors are those who can weather the storm

The growing threat of all-out war in the Middle East has seen investors rush to “safe haven” assets such as gold – the price of the precious metal is up 45pc since the start of the year.
At the same time, regional escalation has caused oil prices to spike, increasing the fear that global inflation will rise again and keep prices higher. This could, in turn, make central banks reluctant to cut interest rates.
However, Andrew Bailey, governor of the Bank of England, has said he is watching oil prices closely and hinted that the Bank may take a more “activist” role and cut more aggressively. 
Historically, geo-political uncertainty only results in short-term impacts on financial markets. Often the shock is notable, but not long-lasting. So for most investors it is a matter of sitting tight until the impact abates and markets revert to the prevailing trends of the time.
The FTSE 100 saw a short boost on Wednesday as growing concern around escalating conflict in the Middle East pushed up energy and mining shares. However, the rally has slowed, although the index is performing well on the expectation of rate cuts. 
Andrew Oxlade, investment director at stockbroker Fidelity International said: “While sharp market movements can be unnerving for investors, staying invested throughout periods of volatility is the best strategy. The conflict in the Middle East is just one thing that adds uncertainty for markets right now. The upcoming election in the US is another. 
“Given markets are trading at historically high levels, it’s not a surprise that these things trigger profit-taking. In that context, investors should be prepared for some volatility in the days and weeks ahead.”
So what can you do to protect your money?
Telegraph Money takes a look at how to shield your investments and whether you can make the most of a potential opportunity.
In periods of uncertainty it is important to remember that the fundamental principles of investing don’t change. Mr Oxlade said retaining diversification within your portfolio is key as it is very unlikely that all asset classes will crash at once. 
Therefore having a mix of assets, from shares and funds to bonds, cash and property, and across different sectors and geographies is always recommended regardless of market movements. 
It is also important to remember your long-term strategy and to weigh up whether any move you make fits with what you’re hoping to achieve. 
Remaining informed is helpful but it may not be wise to monitor every development in a fast-moving and unpredictable situation. 
Kyle Chapman, market analyst at foreign exchange broker Ballinger Group, said: “Since the initial attack last October, traders have formed a habit of producing knee-jerk reactions on each piece of concerning news, before unwinding them just as quickly by the time that the headlines have fizzled out.”
This trend has precedent. Fidelity International looked at total returns (which includes income reinvested) that have followed the 10 worst days for the FTSE 100 since the start of the century, and found that the index has mostly registered notable gains after the biggest single-day sell-offs. 
This serves as a reminder of the ups and downs that stock market investors should expect and that sometimes doing nothing is the best approach. In fact, 85pc of fund group Vanguard Europe’s UK personal investor clients did no trading at all last year. 
James Norton, head of retirement and investments at Vanguard Europe said: “Staying invested over the long-term tends to offer investors a better chance of achieving their financial goals, rather than trying to tactically time the best time to buy and sell.”
However, global shocks may also provide opportunities. If you already hold shares in a company and the rationale for the investment remains unchanged but the price has dropped, it could be worth buying more.
Stocks in the US have fallen following the news of possible retaliation by Iran so it may be worth checking your buy list to see whether now is a good moment to make a move. 
It is however hard to predict when a price will bottom out so consider spreading out your purchases over time to benefit from a range of prices, so-called “pound cost averaging”.
Even if you don’t have significant investments, war in the Middle East could have far-reaching monetary implications. 
In August the Bank of England decided to cut the Bank Rate by 0.25 percentage points, the first reduction since 2020, in recognition that inflation had fallen to near the central bank’s 2pc target. 
There is now a fear that rising oil prices will push inflation back up. Brent crude, the international benchmark for pricing, jumped as much as 3.5pc on Wednesday to more than $76 (£58) a barrel. 
Sanjay Raja, chief UK economist at Deutsche Bank said: “The Bank of England has focused on underlying inflation for some time now. Movements in oil prices won’t impact that directly, but could have some (modest) spillover effects.”
However, Andrew Goodwin, chief UK economist at Oxford Economics argues that there may also be concerns that the higher oil price will hit demand and weigh on the growth outlook, which could lead to the Bank cutting rates more aggressively. 
In his view the Bank’s Monetary Policy Committee has changed its strategy over the past few months from taming inflation to a more “forward-looking” approach to boost growth.
This seems to bear out. Mr Bailey has said the Bank’s rate setters could become “more aggressive” at cutting rates, comments traders have seized on. The market now expects two rate cuts before the end of the year. 
If this is the case then the change would be welcome news for borrowers, including mortgage holders, who could see rates fall further than currently anticipated.
For savers however, it could spell bad news. Falling interest rates reduce the returns offered on the money you put aside and faster drops could impact financial plans if what you make isn’t as much as expected. 
Yet, the Bank is unlikely to stray far from its famously measured approach.
Huw Pill, the Bank of England’s chief economist and a member of the Monetary Policy Committee, has said: “While further cuts in Bank Rate remain in prospect should the economic and inflation outlook evolve broadly as expected, it will be important to guard against the risk of cutting rates either too far or too fast.”