Why do institutional funds always follow the same path in the face of geopolitical conflicts?

Author: Felix Prehn 🐶

Compiled by: Deep Tide TechFlow

Introduction: The author is a former investment banker. The value of this article lies not in predicting the course of conflicts, but in dissecting a three-stage institutional fund flow model spanning the Gulf War, the Iraq War, and the Russia-Ukraine War. Retail investors losing money during conflicts is almost a systemic error; this article points out the specific reasons and corresponding strategies, with logic far clearer than emotionally driven analysis.

The full text is as follows:

There's a deluge of news about the US and Iran right now.

If you're wondering if this conflict can be profitable—the answer is yes. Let me tell you exactly how.

Having worked in investment banking for many years, I specialize in finding what Wall Street call "event-driven opportunities." It's their sophisticated way of referring to war. In every major war—the Gulf War, the Iraq War, the Russo-Ukrainian War—the same three-stage market pattern emerges, determining where institutional funds will flow next.

Phase 1: Shock – Panic selling by retail investors.

Phase Two: Repricing – The market calms down and reassesses.

Phase 3: Rotation – Institutional funds flow into new sectors.

The US-Iran conflict is now following the same pattern. The shock phase has begun. What will happen next, and where the real money will flow—can be predicted if you know what to look for.

This is what I'm giving you here.

How retail investors do it vs. how institutional investors do it

When conflict arises, retail investors typically do one of the following three things.

Converting everything to cash—thinking it's for safety—is actually ensuring you're protected from inflation.

Frozen—staring at a patch of red, unable to move, doing nothing.

Or they chase after things that have just surged—oil, defense stocks, gold—buying at the exact wrong time because fear drives them to act, and they have no plan.

Meanwhile, none of the institutions managing billions of dollars are doing this. They are repositioning themselves based on patterns of conflict they've studied for decades. Not emotions, but patterns.

I'll teach you the same thing.

The pattern that repeats itself every time

In the first 10 days after the outbreak of geopolitical conflict, the S&P 500 fell by 5% to 7%. About 35 days later, it was flat. 12 months later, it rose by 8% to 10%—which is roughly the average performance of the market in any ordinary year.

Real historical examples:

During the Gulf War, the S&P 500's annualized return was 11.7%. After the war ended, it rose 18% in the following 12 months.

During the Iraq War in 2003, the market rose 13.6% in three months.

During the 2022 Russia-Ukraine war, the S&P 500 initially fell by 7%, before rebounding to above pre-invasion levels within a few months.

Wars rarely destroy markets. They create uncertainty, uncertainty creates downturns, and downturns create opportunities.

Why is Iran so important?

Iran produces 3.3 million barrels of oil per day.

Any upgrade—even a mere sensory upgrade—increases supply risk, and this risk can have far-reaching consequences.

The market doesn't wait for actual supply disruptions; it prices in the risk of disruptions in advance. Traders assume that some oil production might stop, meaning reduced supply while demand remains unchanged, which means higher oil prices. And oil is an input to almost everything—transportation, manufacturing, shipping, food production, fertilizers, heating, and cooling.

Rising oil prices mean higher costs across the board. Higher oil prices lead to higher inflation. Higher inflation means the Federal Reserve is more likely to maintain high interest rates rather than cut them. Higher interest rates mean more expensive mortgages, auto loans, and business borrowing. More expensive borrowing means lower corporate profits. Lower profits mean lower stock valuations.

Three phases of each conflict

Every geopolitical conflict drives funding through three distinct phases. Understanding which phase you're in will completely change what you should be doing.

Phase 1: Impact.

This phase is fast, intense, and driven by emotion and algorithms. Oil prices soar. The VIX—the market fear index—skyrocketes. Risk stocks plummet. Biotech, high-growth technology, and speculative stocks—all are sold off as funds flow into safe-haven assets. Gold rises. Financial media enter 24/7 rolling news mode, designed to instill as much fear as possible.

This phase can last for days, sometimes even weeks. If you buy oil, gold, or defense stocks during this phase, you're almost certainly buying at the peak. The emotional impulse to act reaches its peak at this time, which is why acting at this point is the most costly mistake.

Phase Two: Repricing.

The panic subsided. The market began to think rather than feel.

The question has shifted from "what happened" to "what will happen next." Is this temporary or structural? Will inflation remain high? What will the Federal Reserve do? Is the supply chain disruption permanent or just temporarily strained?

This is the phase where institutions begin to restructure. Not in the initial days of chaos—but in the subsequent clarity. This is where smart money makes its money. In the calm after the storm, not in the storm.

Phase 3: Rotation.

Funds flowed out of the sectors that were hit hard and into sectors that would benefit from the new reality.

Where does the money actually go?

First: Energy—but not in the way you're thinking of.

The obvious play is oil, and indeed, oil outperforms in the short term. Bank of America's research on geopolitical shocks over the past 90 years shows that oil was the best-performing asset, averaging an 18% increase. What you should hold are companies that benefit from sustained high oil prices: pipeline companies, storage terminals, energy infrastructure—companies that can collect tolls from the flow of oil regardless of price movements.

Second: Defense – but look at the structural aspects, not the general ones.

Yes, defense stocks will surge immediately. Some stocks have already risen more than 30% since tensions escalated. But defense spending isn't a one-quarter event. Governments sign 10-year procurement contracts. Large contractors have backlogs worth hundreds of billions. Look at companies that have planned for spending cycles over many years.

Third: Gold and silver – a longer-term investment strategy.

Gold surged in the first phase, but unlike oil, it tended to remain high. Bank of America data shows that six months after the shock, gold continued to outperform by an average of 19%. This is because the conditions driving gold higher—higher inflation, central bank money printing, and institutional safe-haven demand—don't disappear as the headlines die down. If the conflict drags on, oil prices remain high, and inflation stays sticky, the Federal Reserve won't be able to cut interest rates. That's precisely when gold is at its strongest.

Fourth: Companies with pricing power.

This is the point most people miss. If inflation remains high for an extended period, you should hold onto companies that can pass on higher costs to customers without losing them. Strong brands. High profit margins. Companies where customers have no cheaper alternatives.

Which sectors will be hurt: Utilities and real estate typically underperform during these periods. Higher interest rates over the longer term compress valuations in these two sectors. If you have an overweight position in these sectors, it's worth reviewing your holdings.

What you should actually do

Don't panic and sell. Decades of conflict data make it crystal clear—selling on the initial shock will lock in losses and guarantee you miss the rally. Don't chase after something that's already soared. If it's already in the financial news, you're too late. Don't look at war reports.

Keep your core portfolio intact—high-quality companies with strong brands, high gross margins, and pricing power.

Then examine your holdings and ask two questions: Which positions are most vulnerable in this environment? Where are institutional funds flowing in that I haven't yet exposed?

What you're doing is tilting your portfolio—making a measured reallocation to sectors where institutional money is already moving, before the headlines catch up.

This concerns your livelihood. Your retirement. Your family's financial security.

If you manage risk correctly, you can make money. That's the least provocative thing I can say, but it's the truth.