Implications for defence and global markets
9 MAR, 2026
By Shayan Heidari and Joakim Agerback, Portfolio Managers, Finserve Global Security Fund
The recent escalation represents a meaningful shift in the geopolitical risk environment. Coordinated strikes targeting senior elements of Iran’s leadership structure mark one of the most direct confrontations between Western powers and Tehran in decades. While the long-term political consequences remain uncertain, financial markets have reacted swiftly to the increased probability of sustained regional instability.
Immediate Market Reaction
Defense equities led global markets higher on Monday. RTX rose more than 4 percent, Northrop Grumman advanced approximately 6 percent, and Kratos gained over 5 percent. The move was mirrored across European defense companies, reflecting investor expectations that heightened tensions could translate into prolonged or expanded military expenditure.
On Tuesday, however, sentiment weakened notably. Global equity markets are trading sharply lower amid continued escalation and reports of disruptions to traffic through the Strait of Hormuz. The defense sector is also trading lower, but declines are more limited relative to broader indices, suggesting that the sector continues to be viewed as relatively defensive in the current risk environment.
Markets are now beginning to price in a higher structural geopolitical risk premium. A broader regional conflict remains a tail risk scenario, but one that investors can no longer dismiss.
Structural Context
Iran has for decades positioned itself in strategic opposition to Western interests through its regional proxy networks, missile development programs, and confrontational posture toward United States and allied military presence. Its cooperation with Russia, including reported transfers of drone technology, and its expanding economic ties with China have further embedded Tehran within a broader geopolitical alignment that challenges Western influence.
A material weakening of the Iranian regime, while highly complex and far from certain, would have implications beyond the Middle East. Iran has provided Russia with military support that carries operational relevance. A destabilized or internally preoccupied Tehran could constrain that cooperation. At the same time, internal fragmentation within Iran could increase short-term regional volatility and asymmetric risks.
Iran’s Political Outlook
The removal of senior leaders, even at the highest level, does not in itself determine the fate of the regime. For a genuine regime transition to occur, internal dynamics would be decisive. Sustained popular protests, fragmentation within the security apparatus, or severe economic deterioration would likely be required. External pressure alone is rarely sufficient to dismantle deeply rooted authoritarian systems.
That said, the psychological impact of recent events should not be underestimated. Perceived vulnerability at the top can weaken internal cohesion and alter elite calculations, particularly if personal survival becomes a primary concern.
While uncertainty remains high, the probability of structural change appears higher than in recent years. The key question is whether a credible and organized alternative with domestic legitimacy exists. Reza Pahlavi, son of the former Shah, has emerged as a visible opposition figure advocating a transitional framework and democratic elections.
For markets, Iran’s trajectory could range from the regime reasserts control and prolonged instability to internal fragmentation and a regime transition. The status quo in Iran is no longer the default scenario.
Energy Markets and Capital Markets
The most immediate macroeconomic transmission channel is energy. Iran’s geographic position near the Strait of Hormuz places it adjacent to one of the world’s most critical energy transit routes. Even without formal disruption, elevated threat levels lift oil prices as markets price in precautionary supply risk.
Higher energy prices introduce renewed upside risk to inflation expectations. For central banks navigating fragile disinflation trends, this complicates the policy outlook and may delay monetary easing in certain economies. Energy volatility also increases input cost uncertainty for energy intensive industries.
Historically, acute geopolitical stress produces a familiar pattern. Equity markets typically experience higher volatility. Defense equities, however, often diverge from broader risk assets during sustained geopolitical episodes. When instability becomes structural rather than episodic, defense spending tends to become embedded in multiyear budget frameworks rather than treated as cyclical expenditure.
Russia and China
Over the past two years, the relationship between Tehran and Moscow has deepened materially. Iran has reportedly supplied Russia with drones and related technology that have played an operational role in the war in Ukraine, strengthening military coordination between the two countries. In parallel, economic ties have expanded as both nations face Western sanctions. Bilateral trade has increased, cooperation in energy and banking has intensified, and discussions around alternative payment systems and transport corridors, including the International North-South Transport Corridor, have accelerated. While the partnership is pragmatic rather than a formal alliance, it reflects a shared interest in reducing dependence on Western financial infrastructure and counterbalancing Western influence. Russia nos faces a strategic balancing act. Higher oil prices support Russian fiscal revenues in the short term. However, a weakened Iranian partner could reduce Moscow’s geopolitical leverage in the Middle East and limit certain forms of military cooperation.
This is a marketing communication. Please refer to the prospectus of the UCITS and to the Key Information Document (KID) before making any final investment decisions.
China prioritizes stability above all else. As a major energy importer with investments in Iranian infrastructure through the Belt and Road Initiative, Beijing has a strong interest in avoiding prolonged disruption. A destabilized Iran introduces supply risk and investment uncertainty, while a geopolitical realignment toward the West could reduce Chinese influence in the region.
Both Russia and China are therefore likely to advocate de-escalation publicly while reassessing their strategic positioning behind the scenes.
Conclusion
The current escalation marks a structural inflection point rather than a temporary headline event. Regardless of how Iran’s internal political trajectory unfolds, geopolitical risk has moved higher in the global system. For financial markets, this implies key shifts. Geopolitical risk premia are becoming more persistent rather than episodic. And, energy volatility is likely to remain elevated, reinforcing inflation sensitivity and broader macro uncertainty. Recent market moves in defense equities reflect this reassessment.
