Middle East Tensions and Their Impact on the Stock Market

Investors now worry about possible disruptions to supply chains across the Hormuz Strait as well as oil prices as a result of Israel's recent airstrikes on Iran, which have rekindled geopolitical tensions in the Middle East.

Commenting on the effects of geopolitical conflict on the stock market, Nguyen The Minh, Head of Retail Analysis at Yuanta Securities Vietnam, noted that events like the Israel-Iran standoff typically have short-term negative impacts—usually lasting about a month. However, if the conflict does not escalate into economic dimensions, the market tends to recover within 3 to 12 months.

He emphasised that retail investors are particularly susceptible to psychological pressure and should manage short-term risks to avoid being caught off-guard by market reversals.

Nguyen Viet Duc, Head of Digital Sales at VPBank Securities (VPBankS), concurred, saying that statistically, geopolitical events rarely have lasting effects on the market. “Over the last 50 years, most geopolitical tensions—if they remain localized—only cause stock market declines for one or two sessions,” he said. For instance, recent clashes between Israel and the Houthis only impacted the market for a single day.

In more severe cases, market corrections may extend up to three months. “After events like the 2001 Twin Towers attack or the Gulf War in 1992, markets fell about 10–11% and took roughly 70 days to find a bottom,” Duc explained.

He added that current consensus views the Israel-Iran conflict as a regional issue, mainly affecting oil prices, with the U.S. unlikely to intervene militarily. Oil prices remain in the $70–80 per barrel range—lower than the 2024 average—suggesting the market has largely priced in the conflict. Only in a worst-case scenario involving sanctions would the impact deepen.

Duc also mentioned that ongoing negotiations between the U.S. and Vietnam look promising, although the timing of any formal agreement remains uncertain.

Predicting Highs and Lows: Should You Try?

Given the market's tendency to correct due to sentiment swings or overreactions, experts caution against trying to time the bottom.

“In my opinion, if investors aren’t using margin, there's no need to guess market bottoms,” said Duc. “A historical study from 1970 to 1996 shows that missing just the 12 best-performing months could cut portfolio returns in half compared to a long-term buy-and-hold strategy.”

For the period from 1997 to 2024, missing the top 12 months would yield just a 5% return—on par with long-term bonds. Meanwhile, a buy-and-hold strategy would return around 9.3%. Missing only four top-performing months already places investors far behind the market average.

In contrast, “predicting market peaks” may offer greater upside. If investors could avoid the 30 worst months for the S&P 500, investment performance could rise by 1.5x. Still, predicting both peaks and troughs is extremely difficult, Duc stressed.

He highlighted three investment methods that were examined in the same study: holding 60% of stocks and 20% of bonds, investing entirely in stocks, or maintaining 80% of stocks and 20% in bonds. There was no benefit to trying to adjust timing, as evidenced by the return variations across these scenarios, which were only around 1%.

For non-margin investors, Duc recommends maintaining at least 80% stock allocation. In downturns, reducing that to 70% is prudent, but staying invested is crucial to avoid missing market rebounds.

Many retail investors still try to time market swings—for example, buying at 1,200 points and selling at 1,300 points on the VN-Index. But this approach is risky unless paired with margin. “Just one or two failed calls can significantly hurt returns,” Duc warned.

Institutional Strategies: How the Pros Do It

According to Duc, major investment funds almost never reduce equity exposure below 80%, using only 20% of the portfolio for tactical trading. “In the medium term, good stocks always go up,” he said.

Smaller funds tend to operate with three allocation levels: 100%, 80%, and 30%. In bearish markets, they may cut aggressively to 30%, but generally remain fully invested. When the market is shaky but still trending up, they stay at 80%.

Duc suggested that if the market is still on an upward trend with minor pullbacks, investors should hold 70–80% in equities and only sell heavily once the uptrend clearly ends.

For investors still intent on market timing, he recommended identifying sequence turning points—the exhaustion points in trends. This could involve techniques like Elliott Wave theory or candle-counting models.

“When a stock drops so far it can’t fall further, it’s time to buy. Conversely, after extended rallies, if the upside is limited but the downside risk is large, that’s the moment to start taking profits,” he concluded.