A growing war involving Iran is shaping up to be an "everybody loses" scenario for the global economy, according to analysts at Morgan Stanley, who warn that the conflict could trigger a cascade of financial shocks ranging from higher oil prices to renewed inflation and economic uncertainty.
A team of Morgan Stanley analysts argues that the war could undermine a traditional investment strategy known as the "60/40 portfolio," which balances stocks and bonds. Normally, when stocks fall, bonds rise, providing a hedge. But geopolitical shocks tied to energy prices can push both asset classes in the same negative direction.
"Back in 2021-2023, bond markets that were worried about inflation could not offset losses in equities, which were concerned about growth. Everyone loses in that scenario," they say. Oil prices have already surged in response to the fighting, with global benchmarks rising sharply amid fears of supply disruptions.
Energy markets reacted swiftly as traders began pricing in the possibility that the conflict could significantly reduce oil shipments from the Middle East, which remains the world's most important crude-producing region. The crisis has already pushed prices up roughly 10 to 18 percent in a matter of days.
A major factor behind the surge in oil prices is the disruption of traffic through the Strait of Hormuz, a narrow waterway between Iran and Oman that serves as one of the world's most critical oil chokepoints. Roughly 20 percent of global oil and liquefied natural gas shipments normally pass through the strait each day, making any threat to its operation a major risk to global energy markets.
Since the conflict intensified, shipping traffic in the strait has plummeted as tanker operators and energy companies have suspended operations to avoid attacks. Vessel tracking data shows tanker transits collapsing from an average of roughly two dozen ships per day to only a handful, leaving dozens of vessels anchored outside the passage as companies wait for security conditions to improve.
The war has also led to direct attacks on energy infrastructure across the region. Iranian strikes have targeted oil facilities, shipping lanes, and refineries in the Gulf, contributing to fears of sustained supply losses. A drone attack on Saudi Arabia's massive Ras Tanura refinery, one of the largest oil processing hubs in the world, forced the facility to halt some operations temporarily while exports were rerouted through alternative routes.
Higher energy costs would ripple through the global economy by raising transportation, manufacturing, and food prices. Morgan Stanley says that a prolonged conflict could lead to "higher oil prices, hotter inflation and greater market uncertainty," creating a situation where nearly every major economy faces economic pressure.
Morgan Stanley analysts warn that a prolonged energy shock could even trigger what economists call the "recession playbook," where central banks face the difficult choice of fighting inflation or supporting economic growth.
They also noted that historically many geopolitical shocks have had only temporary effects on markets. However, the current situation is unusually sensitive because of the energy market's central role in the global economy. If fighting ends quickly, the economic fallout could remain limited. But if hostilities continue for weeks or months, the combination of high oil prices, inflation and slowing growth could create broader financial instability.
