Increased ‘geopolitical risk’
Events in Iran in recent days have brought the vague concept of ‘higher geopolitical risk’ from the back pages of presentations to the forefront of investors’ minds. Under President Trump, strikes elsewhere have been short and sharp. This is not the case with this conflict. A timeframe of four weeks already set out by Trump, against a regime now seen as having nothing to lose and with the military capability to hurt the global economy through disruption to shipping and western interests across the Middle East.
Impact on oil prices
Markets tend to focus on oil prices, which is pertinent in the case of Iran given the importance of the Straits of Hormuz to energy markets. However volatile European gas prices have already risen over 20% at a time when Europe is trying to wean itself off Russian energy and stockpiles are low. Whilst China takes the largest proportion of cargoes, competition for available supplies will now intensify.
UK retail customers are protected in the short term due to the April energy price cap having already been set. However, businesses do not enjoy this lagged effect and may face sharply higher energy prices very quickly. This could potentially challenge the inflation outlook and the expectation for a couple of further interest rate cuts this year by the Bank of England.
Potential ‘safe havens’?
Gold closed on Friday at $5278/ounce having exploded in price in the past 2 years. Asset owners are sitting on significant gains and will be wary of adding to holdings at this level, and when many investors already have some exposure. When Russia invaded Ukraine on 24th February 2022 it was at $1908 per ounce, less than half of today’s level. Whilst it is likely to offer some protection, it is unlikely to be the shelter it once was.
Similarly, government bonds are not the obvious move when the most apparent risk is that energy markets are starved of supplies, kicking off another inflationary spike. However, this seems unlikely as while shipping is clearly heavily disrupted, there is no official ‘closure’ of the Straits of Hormuz by Iran. If this were to happen it may potentially trigger a more unified response from the many interests that are keen to see it remain open.
Trump’s motivations
While this conflict may be measured in weeks rather than days, there seems to be no appetite for ‘boots on the ground’. Additionally, President Trump’s recent weak polling heading into the US mid-term elections combined with the recent clipping of his wings by the Supreme Court in their verdict against the emergency use of tariffs is likely to have been a factor in his decision to strike now. With voters likely to react negatively to a longer campaign in Iran, a relatively ‘quick win’ is likely to be sought.
The importance of staying calm
Calm should prevail in markets before too long. For investors, this is the time to hold your nerve. Events such as this can be unsettling but remembering the reasons why you invested in the first place and staying the course over the long-term will continue to be the best strategy, even if we get a period of volatility while events in the Middle East play out.
