If we thought we had an idea of how financial markets and investments might perform this year that has just been upended. The bombing in Iran and new conflict has introduced a new source of uncertainty. It is unlikely to result in peace, as the US hopes, in the short term.

We may see months or years of war in the Middle East. The Strait of Hormuz, through which 20 per cent of the world’s oil and gas supplies pass, is now closed, pushing oil prices sharply higher. If sustained that will add to business’ costs, slow economies and raise inflation.  

Until now inflation has been declining in the US, Britain and Europe. In the US, despite the new import tariffs, inflation is edging lower. That means interest rates were likely to fall at least a little further in those major economies.

That is stimulatory for economies and financial markets. It reduces borrowing costs for businesses to finance expansion, and for consumers to spend.

Unfortunately that isn’t the case in Australia. Excessive Government spending has helped push inflation back up, necessitating the recent interest rate increase. There may be more to come. 

Economists survey purchasing managers in big businesses to develop a leading indicator of future economic activity. Currently the Global Purchasing Manager’s Index of sentiment and forward orders is modestly positive.

US import tariffs may be less disruptive to trade this year. The Supreme Court ruling against many of Mr Trump’s tariffs and his replacement of them with a flat general tariff should mean more certainty, as he starts to focus on voter friendly policies ahead of the November midterm elections.

In Australia the December Half-year company reporting season has been better than expected with more results surprising on the upside than the downside. Expectations of future profits are also quite positive in both Australia and the US.

However share prices are already relatively high compared to profits. As a result dividend payment rates aren’t much above interest rates. Ideally dividends should pay a healthy premium.

Investors have been diversifying away from the big US technology companies into other sectors and countries, which is reducing risk.

Before this conflict investment prospects looked reasonably positive. If the disruption to oil and gas supplies is short, that should remain the case. However if it becomes lengthy the negative influences may dominate. 

It is probably best not to position investments aggressively. Balance may be best, with more focus on overseas shares than Australian, as their outlook appears a little better.