Following Israel’s attacks on Iran on Friday and subsequent retaliations from both sides over the weekend, markets could be in store for a further bout of volatility, experts have said.
While markets are a secondary concern to the devastating loss of life during any conflict, for investors, it will be a meaningful consideration.
On Friday, following the initial missile attacks from Israel, Janus Henderson portfolio manager Oliver Blackbourn said it resurfaced potential issues on the supply of oil and gas to global markets.
The Brent crude oil price spiked towards $80 per barrel at the end of last week, before paring back to $75. It has slipped back a bit over the weekend and in early trading on Monday morning, but is much higher than the $60 level it sat at last month.
This morning, Sam Buckingham, a former fund manager and founder of Buckingham Research, said: “While prices remain relatively contained for now, any further escalation could complicate the inflation outlook and challenge central banks’ efforts to begin easing policy.”
George Brown, senior economist at Schroders, was less concerned around inflation. If Brent crude settles at $75 per barrel, it would imply that G7 energy inflation would be a little above 5% over the next year, he said, which would be unlikely leader to broader inflationary pressure.
“Our previous research on the relationship between oil prices and inflation suggests that every 10% rise in oil prices adds just 0.1% to core inflation,” he said.
There was also little likelihood of Iran targeting the Strait of Hormuz, which handles 30% of the world’s seaborne oil and 20% of liquified natural gas. If this is were to occur, he said it would be “disaster scenario” for oil markets.
However, the chances of this “appear remote” as it would “impact flows for the other Middle East nations, which are aiming to mediate the situation, while inflicting little harm on Israel”.
Iran itself makes up 3.5% of global supply of oil, but Brown noted that, so far, Israel's stated aim has been to impede Iran's nuclear programme. As such, so far it has targeted nuclear and military facilities.
“While oil production facilities remain a potential target for Israel, it has yet to target them directly, quite possibly restrained by the knowledge that pushing oil prices higher would damage its relationship with allies, such as the US,” he said.
Blackbourn added that, although Iran is a smaller proportion of global oil supply than other Middle Eastern countries, its proximity to other key producers, including Saudi Arabia, “makes potential escalation meaningful”.
Despite a weekend of violence between the two countries, investors have shown no signs of panicking, according to Russ Mould, investment director at AJ Bell.
“Future prices imply a positive day for Wall Street when US markets open later on,” he noted.
“The gold price is often a measure of investor sentiment, going up when people are worried and going down when they’re optimistic. The precious metal slipped 0.6% to $3,432 per ounce, which indicates that investors remain alert to ongoing geopolitical tensions but they’re not reaching for their tin hats.”
However, he said that the Middle East conflict remains a “fluid situation” with the potential for markets to experience sudden jolts if it escalates further.
Analysts at Brown Shipley agreed, noting that geopolitical tensions tend to have a short-lived but “unpredictable” impacts on markets.
“It’s possible that we might face additional uncertainty over the coming days or weeks, with phases of escalation and de-escalation. Either way, market volatility could rise further,” they said.
One way to deal with this is through diversification. The firm said it has been diversified for several months and last week (prior to the latest escalation) bought more gold, taking an overweight position to the precious metal.
“We see [it] as a diversifier, protecting against policy and fiscal uncertainty in the US as well as geopolitical risks”, they said.
“We also bought low-volatility equities, which tend to outperform broad equities when the market falls. We continue to hold broad commodities and inflation-protected bonds, which might both benefit from higher oil prices”.