War in the Middle East

The US and Israel launched attacks on Iran over the weekend, killing Iran’s leader, Ali Khamenei. Iran responded by launching missile attacks on Israel and US military bases across the Gulf region including in the UAE, Qatar, Bahrain, and other Arab neighbours. The conflict is threatening to draw in other countries, including the UK, as it was announced a British military base in Cyprus was also attacked.

No oil tankers or containers are currently passing through the Strait of Hormuz, the critical passageway for around 20% of the world’s oil shipping.

Market reaction and outlook

Oil and gas

Brent crude, the global oil benchmark, began the year at around $60 per barrel and has risen steadily over the past few months as geopolitical tensions increased. By last Friday it had reached $73 before spiking to around $80 on Monday morning. Natural gas, another important regional export, also surged in price.

Future price movements will depend heavily on how quickly travel through the Strait of Hormuz is restored. A rapid de-escalation would limit how high oil could reach, but lasting damage to energy infrastructure in the region could generate longer lasting price pressure. The impact may be cushioned somewhat by the global market’s recent excess supply conditions.

Equities

Direct Middle Eastern equity market exposure is low. However, the indirect impact from the oil price movements and higher geopolitical risk has impacted global equity markets. European equity markets opened lower by around 1.8%, while Asian markets fell overnight. UK equities outperformed relative to Europe due to gains in FTSE listed energy companies. Sectors that are more sensitive to the oil price such as airlines, and cyclical sectors including banks, lagged. The US futures markets was down around 1% at the London open on Monday morning.

Safe havens

Investors have turned to safer assets such as gold and the US dollar, which were up over 1% and 0.5% respectively on early trading. Government bonds also remained resilient.

Events like these normally generate short-term price movements, as investors fear the uncertainty. These movements tend to be fleeting. However, a sustained elevation in the oil price can have implications for inflation and global growth, potentially leading to longer term economic and market impacts. Although central bankers, such as the Federal Reserve and the Bank of England, normally try to “look-through” one-off increases to the price level, this may increase their reluctance to continue with interest rate cuts.

Portfolios

As with most geopolitical events, maintaining discipline and avoiding reactive decision-making remains key. After the short-term market volatility settles, we will reassess any long-term implications. At this stage, we remain comfortable with our portfolios’ current positioning and are not making any changes.

We believe our diversified regional, style and sectoral exposure should help portfolios navigate any market volatility, in particular our energy and listed infrastructure exposure should provide a ballast to portfolios. In addition, we believe our portfolios’ government bond exposures gives a degree of protection should a risk-off sentiment build further.