How Middle East tensions are shaping European markets | AJ Bell

Geopolitical tensions in the Middle East have heightened global economic risks, particularly through inflationary pressures and energy price volatility. European economies are especially exposed due to their reliance on imported energy, while European markets delivered strong returns in 2025. AJ Bell has made modest tactical reductions to European equity exposure across its funds and Managed Portfolio Services, reflecting narrowing valuation gaps and growing US sector opportunities while Europe remains a core source of diversification within portfolios.

Markets on edge? Why diversification is your first line of defence.
Get expert guidance on MPS construction, asset allocation, and portfolio design by downloading IFA Magazine’s latest MPS Insights Publication HERE

Sharing his latest update on the impact of the Middle East conflict on European markets, James Flintoft, head of investment solutions at AJ Bell, comments: 

“Global markets have experienced instability due to conflict in the Middle East, with a fluctuating oil price impacting markets. Following strong performance and positive flows into European equity markets through 2025, we trimmed our allocations to the region in early 2026. Europe ex-UK remains an important source of global diversification, but valuations had moved and opportunities shifted as investors eagerly await the impact of government spending on defence and infrastructure. 

European equities delivered robust returns in 2025, with the Morningstar Developed Markets Europe ex-UK TME up 26.5% on a total return basis in sterling terms*, supported by attractive starting valuations, steadying inflation and favourable currency moves for sterling-based investors. This combination justified meaningful portfolio allocations across our funds and MPS. 

In January 2026, we reduced European ex-UK exposure, typically by 1% to 6% depending on the portfolio. The primary driver has been narrowing valuation differences with the US and stronger earnings momentum in American markets, particularly in sectors underrepresented in the S&P 500 such as Energy, Healthcare and Utilities. This is a rebalancing exercise, not a change in the long-term view on Europe. 

Since then, the conflict with Iran has raised global economic risks, especially for importers of energy such as Europe and the UK. This shifting situation has hit European equity markets hard over the last two weeks and left the market largely flat year to date. 

Europe ex-UK continues to offer distinct sector exposure through large global companies in pharmaceuticals, luxury goods, engineering and consumer brands. Whilst Europe ex-UK remains a core building block in our portfolios, it is important to acknowledge the risks and maintain diversification with allocations elsewhere.”