As the Middle East conflict continues to escalate, investors may be understandably concerned about the potential impact on their portfolios. "Despite unsettling news headlines and efforts by world leaders to de-escalate the situation, such as recent diplomatic interventions and United Nations Security Council meetings, the market reaction has been relatively muted," says Maarten Ackerman, Chief Economist at Citadel. "This is largely due to the fact that markets had already anticipated the escalation, with many analysts predicting such developments as early as a year ago."
Immediate market
Ackerman adds, "Over the past few days, oil prices have seen a moderate increase, but this upward trend began before the latest escalation. Markets are not too concerned about a potential disruption in oil supply, largely because the Organization of the Petroleum Exporting Countries (OPEC) has reaffirmed its commitment to increasing supply by year-end. This means that, for now, global oil supply is expected to remain stable despite the regional tensions."
He continues, "Similarly, the price of gold, a typical safe-haven asset, has seen little movement in response to the conflict."
"Risk assets have shown mixed reactions," Ackerman explains. "While the (United States) US and European equity markets experienced marginal declines as investors adopt a more cautious stance, Asian markets have been largely unaffected, buoyed by the Chinese government's recent stimulus measures.”
"In currency markets, we saw the US dollar strengthen slightly overnight," Ackerman notes. "This caused the rand, which was approaching the R17.00/$ mark, to reverse course and start trading at around R17.46/$ as the day opened."
Conflict economics
Ackerman also highlights the broader implications of the conflict. "The current conflict in the Middle East differs from the Russia-Ukraine conflict, which caused widespread disruption to global markets. The Russia-Ukraine conflict led to a sharp spike in global inflation due to major disruptions in the trade of essential commodities. Ukraine is a significant exporter of food commodities like barley, corn, and wheat, while Russia is a leading supplier of crude oil, petroleum products, and natural gas."
"In contrast, the Middle East conflict does not present the same level of global commodity risk," Ackerman clarifies. "The countries involved are not major suppliers of key global commodities, and OPEC’s ability to boost production should mitigate any potential disruptions in oil supply. The primary risk remains the potential for the conflict to escalate further, which could negatively impact global markets if more countries or geopolitical players become involved."
Local investments
"Looking at market performance over the past year, the strong returns generated suggest that markets are not too concerned by the conflict in the Middle East, at least not yet," Ackerman observes. "However, this could change if the situation escalates or spreads to other regions."
He continues, "Safe-haven assets, such as gold, which traditionally act as hedges against geopolitical risk, have performed well. For example, the price of gold has increased by more than 30% since the conflict began. Our portfolio strategy, which includes a balanced allocation to safe-haven and risk-mitigating assets, has positioned us well to navigate the current uncertainty."
"As always, we continue to monitor global events closely and will adjust asset allocations as necessary," Ackerman concludes. "Despite increased geopolitical risks, there are investment opportunities for those who adapt to changing market conditions.
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