Global financial markets are wrong in hoping that the worst is over in geopolitical crises such as the Iran-Israel conflict and the Russia-Ukraine war, wrote Christopher Wood, global head of equity strategy at Jefferies, in a recent note to investors called ‘GREED & fear’.
While most investors and the media are focused on United States (US) Federal Reserve policy and the “endless chatter” of Fed governors, Wood believes the news flow in the financial sphere “pales into complete insignificance” compared with the “tectonic shifts” going on in geopolitics.
“GREED & fear gets the sense that markets are currently hoping that tensions in the Middle East/West Asia have peaked with Israel’s almost formalist kabuki-like response last weekend to Iran’s attack on Israel the previous weekend.
"While it is natural for markets to have such hopes, that is certainly not GREED & fear’s view.
"Rather the base case is that in both the Ukraine-Russia conflict and in the Middle East tensions are likely to continue to escalate,” Wood wrote.
If the “base case” is that the Russia-Ukraine conflict will continue in the months leading up to the November 2024 presidential election in the US, the concern for the Joe Biden administration remains renewed tensions in West Asia triggering a further rally in the oil price at a time when the inflation issue is not yet fully dealt with.
“GREED & fear would be astonished if the world has witnessed the last of Israel’s actions against Iran following last week’s formalised response, though Israel can clearly bide its time in terms of when to implement a more telling response, with the obvious high beta play an Israeli attack on Iran’s nuclear facilities,” Wood wrote.
Such a move before the US presidential election in November this year, Wood said, would be extremely provocative, given the likely impact on oil prices
and related financial markets.
Brent crude oil prices continue to trade firm around the $90 a barrel mark.
In calendar year 2024 (CY24), Brent crude oil has risen around 17 per cent from nearly $79 a barrel as at the end of December 2023.
A large part of this rise has been on account of geopolitical issues, besides OPEC+ moves to restrain supply.
Investment strategy
If geopolitical tensions between Iran and Israel escalate significantly, analysts at UBS warn that there will be a risk of panic selling and increased volatility in global stock markets.
The markets, especially in India, will keep a close eye on crude oil prices which are shaped by geopolitical events such as the Iran-Israel conflict.
That said, analysts at UBS advised investors not to sell stocks or exit markets even if tensions due to the geopolitical events such as Iran-Israel conflict escalate.
While experts caution against volatility in the global stock markets, they expect such choppy movement to be short-lived.
“We would caution against exiting markets in response to flare-ups in international conflicts.
"Barring a serious disruption to oil supplies or trade routes, which remains a risk, the effects of such episodes have tended to be short-lived,” wrote Mark Haefele, global wealth management chief investment officer at UBS, in a recent co-authored note.
Since Japan’s attack on Pearl Harbor in 1941, the UBS note said, the S&P 500 index has been higher two-thirds of the time 12 months after the start of a crisis.
Half the time, markets have only taken a month to recover, according to UBS’ analysis.
