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Investors urged to ‘stay level-headed’ as headwinds mount

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By Charbel Kadib
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4 minute read

The latest flare-up in geopolitical tensions has cast a new shadow over the outlook for global markets, but barring a multinational spillover, the impact is expected to be “modest”.

Islamist group Hamas’ attack on Israel over the weekend has stoked fears of market tumult, with a 4 per cent spike in crude oil prices threatening to exacerbate inflationary pressures – as they did following the Russian invasion of Ukraine.

Gold prices have also continued to regain value following a sharp decline in late September, rising to as high as US$1,861 per ounce.

However, bond and equities markets have remained largely stable, with the S&P/ASX 200 up over the past week.

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Looking ahead, AMP Capital chief economist Shane Oliver said he does not expect the Israel-Hamas war to significantly alter the investment outlook unless other Middle Eastern countries are embroiled in the conflict.

“So far, the market reaction to the conflict has been modest with shares little affected and oil prices up 4 per cent but still below recent highs,” he said.

“If the conflict stays contained to Israel, the impact will be minimal. If not, then expect a bigger flow on to oil and hence petrol prices.”

Mr Oliver said unlike the market response to the war in Ukraine, the Israeli conflict comes in the context of broader weakness in aggregate economic activity.

“Eighteen months ago, when oil prices surged into the Ukraine war consumers wore higher petrol prices because they had pent-up demand and savings buffers after the lockdowns and monetary policy was easy and so higher oil prices just added to inflationary pressures,” he continued.

“This time around it’s very different – the reopening boost is behind us, monetary policy is tight, and household budgets are under severe strain so the rise in petrol prices is more likely to act as a tax on spending.

“Our estimate is that the average household weekly fuel bill is already up $12 since May. With stretched household budgets this means a further hit to consumer spending and less ability for companies to pass on price rises including from higher transport costs.”

According to Seema Shah, chief global strategist at Principal Asset Management, investors are “best suited to stay level-headed” in this rapidly evolving macroeconomic environment.

However, Ms Shah acknowledged while the direct market impact of geopolitical tensions are generally “short-lived”, indirect impacts on inflation, market confidence, and economic growth can be “damaging”.

​Like Mr Oliver, Ms Shah said the outlook for global markets hinges on developments in oil prices.

​“Brent crude prices have risen around 5 per cent so far, heading toward the $90 per barrel mark. This increase only partially unwinds the 11 per cent drop in oil prices last week, but there is strong potential for a further rise in prices, although the extent is subject to significant uncertainty,” she observed.

Some have sought to draw parallels between the latest Israel-Hamas conflict and the 1973 Yom Kippur War, which triggered a surge in oil prices and a subsequent shock to the global economy.

But Ms Shah downplayed these links, noting that unlike in the 1970s, the world’s largest economy, the United States, is less vulnerable to movements in oil prices.

“…One key difference today is that the US is a net oil exporter. As a result, the US economy is significantly less vulnerable to spiking oil prices,” she said.

“In addition, the US holds vast resources of fossil fuels, which should subdue any potential price increase.

“For investors, a surge in oil prices toward the all-important $150 p/b mark would likely require a significant escalation in tensions, including potential strikes on Iran’s nuclear facilities.”

Investors urged to ‘stay level-headed’ as headwinds mount

The latest flare-up in geopolitical tensions has cast a new shadow over the outlook for global markets, but barring a multinational spillover, the impact is expected to be “modest”.

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