Bank of America warns Iran war may hit Europe and Japan stocks

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Iran war may hit Europe and Japan stocks

Highlights

Geopolitical tensions impact European and Japanese stocks.
Capital shifts toward oil and U.S. dollar.
South Korea’s Kospi index has experienced significant fluctuations, recording both record declines and the largest increase since 2008.
Impact on global investment strategy.

According to Hartnett, in the case of an extended war investors are likely to move away from markets that depend heavily on oil imports and have relatively small energy sectors, including Europe, Japan, and South Korea. Instead, capital may flow into oil, the U.S. dollar, and sectors such as U.S. technology and global defense companies.

Pressure builds on European and Japanese markets

The shift in investor positioning has already started since the United States and Israel launched military actions against Iran. As the conflict continues to unfold, volatility across global markets has increased, with investors avoiding assets sensitive to rising energy prices.

European stock markets are heading toward their worst weekly decline since April of last year, when global markets were shaken by concerns over a tariff dispute between the United States and China. A similar trend is visible in Japan, where the Nikkei 225 index is also experiencing a notable decline.

The South Korean equity market has shown particularly strong volatility. The Kospi index has recorded both one of its steepest declines and its largest rally since the global financial crisis of 2008 during the same week.

Oil market and the Strait of Hormuz

Investor attention is also focused on developments around the Strait of Hormuz, a critical route through which a significant share of global oil shipments passes. The conflict has now entered its seventh day, and market participants are increasingly concerned about the possibility of severe disruptions to energy supplies through this strategic passage.

Hartnett noted that further escalation of the conflict could involve broader efforts by the United States to secure oil supplies. Such actions could be linked to maintaining the country technological leadership, including in artificial intelligence, which requires substantial energy resources.

Global investment strategy under review

The current situation could also challenge Hartnett long-standing recommendation to favor assets outside the United States. Since late 2024, the strategist has advised investors to increase exposure to international equities, and that call proved successful: during that period, the MSCI ACWI ex US index gained about 33%, compared with a 15% rise in the S&P 500.

However, rising geopolitical tensions may alter the balance in global markets. If the conflict becomes prolonged and leads to sustained increases in energy prices, investors may continue reallocating capital toward commodities, defense stocks, and U.S. technology companies, while reducing exposure to European and Japanese equities.

It was earlier reported that European stocks rise despite oil supply concerns.

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