Geopolitical Shocks: What Moves First and Why It Matters

Geopolitical shocks are often treated as unpredictable events that markets simply react to. In practice, their impact tends to follow a recognizable pattern, particularly when energy supply is involved. The 2026 Middle East conflict offers a useful case study in how these shocks move through markets and what investment practitioners need to watch in real time.

This analysis covers the period from February 27 to March 20, 2026, capturing the most intense phase of the conflict. The escalation of the conflict in early 2026 triggered a rapid repricing across global markets. Within days of the February 28 airstrikes, oil prices surged, equity markets turned volatile, and risk was quickly reassessed. But the episode was not just another bout of market stress. It followed a familiar pattern: energy prices adjusted first, equity markets followed unevenly, and outcomes diverged based on underlying exposure.

For portfolio managers, risk managers, and financial analysts, the value lies less in the timeline of events and more in what this sequence reveals about where to look and how to position as the shock unfolds.

Energy markets were the first and most forceful point of impact. Brent crude oil prices rose from $72 per barrel to $100 as supplies through the Strait of Hormuz-- through which one-fifth of global oil transits-- were disrupted. The disruption extended beyond crude when Qatar declared force majeure on a portion of its liquefied natural gas (LNG) exports, pushing European natural gas prices sharply higher.

The move in energy markets came first and carried the most information. By the time equities sold off in a meaningful way, oil had already repriced the shock. This is a recurring pattern. In conflicts that threaten supply, energy markets adjust immediately. Equity markets follow, but with a lag and often with more noise.

If oil is moving on supply risk, waiting for confirmation from equities is usually too late. These moves reflect the initial phase of the shock, with market conditions continuing to evolve as the conflict unfolds.

Equity markets did not move in unison. The S&P 500 declined modestly and recovered steadily from mid-March onwards, reflecting the relative insulation of the US economy from direct energy supply risk.

The NIFTY 50 told a different story. It fell approximately 11% within a few trading sessions, reached its lowest point during the Strait of Hormuz closure, and had not recovered its pre-conflict levels by the end of the observation window.

This was not incidental. India is a clear example. Its structural position as one of the world’s largest oil importers means that an energy supply shock and higher prices carry direct consequences for its import bill, current account balance, and domestic inflation trajectory. The United States, by contrast, is less exposed to imported energy in the same way, and that difference showed up in market performance.

For investment practitioners, this is not a new idea, but it is often underused in practice. Emerging markets are frequently grouped in portfolios, yet their sensitivity to energy prices varies widely. For investors across geographies, this means that when evaluating emerging market exposure, energy import dependence is not a secondary consideration. In episodes like this one, it becomes the primary determinant of drawdown severity and recovery speed.

A useful question to ask in this instance would be: Which markets are most exposed to higher energy costs, and how quickly does that feed through to growth and inflation? Positioning around that question tends to explain more of the outcome than broad “risk-on/risk-off” thinking.

Gold held consistently above pre-conflict levels through the most uncertain phase of the period, easing only as equities began stabilizing in mid-March. The absence of dramatic spikes is more informative than a sharp move would have been.

It indicated that while uncertainty was real and sustained, markets were not pricing in a full systemic breakdown. For portfolio construction purposes, gold functioned less as a reactive trade and more as a reliable barometer of underlying investor anxiety, which is precisely the role a well-constructed hedge is meant to play.

The market response across the observation window unfolded in three identifiable phases: cautious alertness in the immediate aftermath of the airstrikes; peak fear through the first two weeks of March as supply disruptions materialized; and gradual stabilization as the conflict narrative settled and supply rerouting had begun.

Each phase mapped closely onto specific conflict developments, confirming that markets were responding to substantive, supply-relevant events rather than sentiment noise. Investors who could distinguish between these phases in real time were better able to avoid impulse selling at peak stress and to re-enter as volatility compressed.

This conflict reinforces several principles that belong in any practitioner’s geopolitical risk framework.

1. Energy supply infrastructure is the critical variable. When a geopolitical shock threatens a major chokepoint such as the Strait of Hormuz, its impact propagates to broader markets is fast, broad, and asymmetric. Portfolios with explicit exposure to supply-route risk, whether through emerging market equities, energy imports, or commodity-linked positions, need to account for this mechanism before a crisis, not during one.
2. Not all equity markets are equally vulnerable. The developed versus emerging market divergence observed here is structural, not episodic. Investors holding significant emerging market allocations in countries with high energy import dependence should stress-test those positions against oil price scenarios as a matter of routine.
3. Safe-haven positioning is most effective when it is pre-emptive. Gold’s steady performance during this period rewarded investors who held it as a strategic allocation rather than those who sought it reactively once fear had already peaked.
4. Geopolitical risk events tend to follow a mean-reverting pattern once the acute phase passes, but that reversion is uneven across assets. In this episode, US equity volatility compressed faster than Indian equity or energy market volatility, suggesting that residual uncertainty lingered longest in the assets most structurally connected to the conflict’s economic consequences. Position sizing and exit timing need to reflect this asymmetry.

Geopolitical shocks are hard to predict, but their market impact is often more consistent than it appears. Energy prices tend to move first, equity markets follow unevenly, and the largest effects show up in economies that are most dependent on imported energy.

For investors, the edge is not in forecasting the event, but in recognizing this sequence early and acting before the full repricing plays out. That means watching supply disruptions closely, understanding where portfolios are most exposed, and avoiding the instinct to react after volatility has already peaked.

This blog post is based on an earlier case study conducted by the author. A longer version of this analysis is available on SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6595678