Iran conflict: markets and valuation implications

After the United States and Israel launched large-scale coordinated strikes on Iran on the last weekend of February, killing Iran’s Supreme Leader Ayatollah Ali Khamenei, and with Iran immediately responding with missile and drone counterattacks on various countries in the Middle East, global financial markets have seen surges in volatility across all sectors as a result of this conflict.

This increased volatility has major impacts on financial holdings and valuation uncertainties, with global trade and travel remaining disrupted as the conflict continues.

Jorge Fernandez Revilla

Partner, Head of Asset Management

KPMG in Ireland

mail
call

Commodity and FX markets

Oil prices surged around 7% when markets opened the following Monday, and have continued to rise since, to over $100 per barrel, as a result of Iran closing the Strait of Hormuz, though which approximately 20% of the world’s oil supply is transported.

Gold prices rose over 1% immediately after the strikes, as investors rushed towards safe haven assets, before correcting soon after, but has remained volatile since.

Similarly, the US Dollar has strengthened following these developments, gaining 1.93% and 3.36% versus GBP and EUR respectively.

On the other hand, JPY saw the opposite outcome, losing 2.35%, as more risk-sensitive and emerging market currencies have weakened.

Source: LSEG

Source: LSEG

Equity markets

Equity markets reacted with a sharp dip worldwide, with the FTSE100, and STOXX600 recording losses between 1.19% and 1.65% on Monday trading, while the S&P 500 was less affected, with most equity indexes globally weakening since the strikes. Volatility indexes spiked to their highest levels since Trump’s tariff announcement almost a year ago, continuing to rise in the weeks after the strikes.

Source: LSEG and Bloomberg

Source: Bloomberg

Interest rate and credit markets

Inflation expectations increased significantly, driven mainly by the surge in oil prices, with central banks likely to delay any planned interest rate cuts. Most government bond yields increased sharply during the week, as investors moved towards safe-haven assets, while most CDS spreads increased, particularly ones with lower credit quality.

Source: Bloomberg

Source: Bloomberg

Fair value considerations

Growing uncertainty

The increased volatility at the moment is a clear indication of the growing uncertainty in global financial markets. As this continues, valuations will be seen to have increased significance of Level 3 inputs, with notable impacts on portfolios of all asset types.
Discount factors

We may see increased impacts in, and uncertainty of, discount factors being applied, which will have larger influences on financial instruments with longer durations and worse credit quality.
Default risk

Higher risks of defaults will also have a greater effect on more complex asset backed positions, where collateral quality is a consideration.
Further escalation

While some markets have rebounded quicker than others, these movements may be a sign of things to come if the conflict escalates further.

How KPMG can help

Fair value determinations

KPMG provides expert guidance on fair value determinations, ensuring adherence to industry standards and best practices. With the changing climate, we can help navigate challenges in choosing the most appropriate inputs, model and assumptions.
Classifying securities

We assist in classifying securities within the fair value hierarchy, including analysis of unobservable inputs and their significance.
Stress testing

We can perform stress testing of valuation inputs under various scenarios and market conditions to assess their impact on a portfolio or position level.
Accurate pricing

We monitor market conditions and financial reporting standards, using proprietary and top tier third-party data for accurate pricing.

Get in touch

Reach out to our Asset Management team to discuss these topics further and see how we can help your organisation. We look forward to hearing from you.