How To Prepare Your Investment Strategy As Iran Conflict Threatens A UK Recession

The recent events in the Middle East have prompted an economic shock that may pull the United Kingdom into a recession, but how can investors keep their portfolios safe should a sustained economic downturn occur?

According to findings from The Item Club, which uses Treasury economic modelling to produce its reports, the UK economy is set to ‘flirt’ with recession in 2026, putting 250,000 people at risk of losing their jobs.

The forecaster claimed that the war in Iran and energy shock from the closure of the Strait of Hormuz were the key contributors to the outlook, with further shifts in global oil costs becoming more likely due to geopolitical uncertainty in the Middle East.

Should the war in Iran become more protracted, The Item Club is forecasting that UK economic growth could fall to 0.7% for this year, which would be half of the 1.4% achieved last year. The jobs market would also face its biggest hit since the pandemic, with unemployment rising to 5.8% from current levels of 5.2%.

Given the inflationary impact of the rising cost of energy, the economic outlook for the United Kingdom is closely tied to the situation in the Strait of Hormuz. 

“Inflation is the measurement of how much the price of goods and services increases over time,” noted a Wealthify explainer on the wider impact of inflation. “When inflation rises, the price of goods and services does the same - which means your money buys less than it did before.”

“Inflation can make company costs rise, which may lower profits and share prices in the short term. Over the long term, however, they can also raise them to stay in line with inflation, helping shares hold their value.”

With this in mind, it’s important that investors and pension savers look to rebalance their holdings in case a recession becomes more likely in 2026. But how can you take proactive measures to keep your wealth safe from an economic downturn? Let’s take a deeper look at some key practices: 

Don’t Panic

The first and most important thing to keep in mind is that you shouldn’t panic and sell your stocks and shares. 

Panic selling doesn’t only mean that you’ve realised your losses, but history shows that markets generally recover from downturns over a long period of time. This means that acting on fear and selling at a lower price only means that it’s much harder to recover your lost funds.

Always Diversify

Recessions can have an uneven impact on equities, so the best way to build resilience for your investments is to diversify your holdings to reach across many different sectors and asset classes.

This means that when one industry struggles to sustain its momentum, your funds will be protected by other sectors that may have a better level of durability in uncertain circumstances.

Diversification is a good idea even when markets are soaring. It can seem counterintuitive for investors, particularly when a certain type of growth stock is performing far better than others, but any sign of volatility can lead to steep losses in a way that would be mitigated if you have a portfolio that spans different sectors.

Use Pound-Cost Averaging

The Atlantic cousin of ‘dollar-cost averaging,' pound-cost averaging is an excellent way to shake off short-term volatility by investing through regular, automatic transfers. 

How does pound-cost averaging work? Instead of trying to time the markets and buy dips, by regularly investing the same amount each month, you’ll be locking in your equities at their average price, purchasing more during periods when they’re at a discounted rate while steadily building your exposure to certain companies.

Over a long enough timeframe, your pound-cost averaging strategy will ensure that you pay a fair value for your assets, which can be advantageous during a recession when stocks can fluctuate in unpredictable ways.

Choose Equities Wisely

Markets behave differently during financial downturns. The stocks at the top of the FTSE 100 and S&P 500 aren’t guaranteed to continue leading the way in terms of growth when new economic pressures enter the fray.

Instead, prioritise companies with strong balance sheets, high cash flow, and low levels of debt, as these stocks are more likely to show resilience when a downturn is in full swing.

You should also focus on defensive sectors, which are industries that sell essential goods and services, like healthcare, consumer staples, utilities, and discounted goods. These all typically perform better than more discretionary sectors.

Navigating a Recession

Although there’s no guarantee that we’re definitely heading for a recession in the UK this year, by keeping these strategies in mind, you can be better prepared for the uncertainty that comes with sustained economic downturns in the months ahead.

By focusing more on resilience and prioritising stocks that are better positioned to survive a difficult time economically, you can ensure that your investments continue to help you in achieving your financial goals, looking further afield.