AMP chief economist Shane Oliver said the muted reaction to the US strike on Iran’s nuclear infrastructure and the limited retaliation that followed points to a structural shift in investor behaviour.
“Markets were right not to get too negative,” he said. “The latest experience will likely reinforce investment markets’ reduced sensitivity to events in the Middle East. The experience of the last two weeks also highlights the difficulty of trying to pick market moves around geopolitical events.”
Global oil prices, which spiked on initial fears of a wider conflict, have since fallen back below levels seen before the war started, and equities have continued to climb. The ASX 200 is likely to post its biggest financial year gain since the COVID-19 pandemic, as Wall Street hits new record highs.
Elaborating on market behaviour during a recent episode of the Relative Return Insider podcast, Oliver said markets operate without a moral compass, reacting solely to the prospect of economic disruption or policy shifts.
“Markets just operate on a simple basis. Is there going to be disruption to economic activity or higher interest rates? And then regardless of how many people are killed, just move on,” the chief economist said.
He drew parallels with the market response to terror attacks in the 2000s.
“After 9/11, US shares fell about 15 per cent. But each subsequent attack had less impact. Investors thought, ‘Yes, it’s terrible, but what’s the impact on economic activity?’ Not much, we’ll just move on to the next thing,” he said.
“So maybe the same thing’s happening here in relation to the Middle East, which some would say is a terrible thing. But I don’t think it’s sharemarkets’ role is to prevent wars. Ultimately, markets just take a judgment value. What’s going to be the impact on profits, good or bad, and then there’s no impact, they move on.”
While the Middle East remains volatile, Oliver said the assumption among investors is that major powers will act to prevent any serious disruption to global energy supply.
“It’s unclear how much damage the US bombs really did, the Iranian regime remains, it likely still wants nuclear weapons and US-led interventions in the Middle East often destabilise things for the longer term rather than stabilise them. But at least, for a while, things should settle down,” Oliver said.
Ultimately, the chief economist said, the best approach for investors is to maintain a long-term strategy with a well-diversified portfolio.
“[These events] do throw up opportunities for investors at times – cheaper shares and overvalued oil,” Oliver concluded.
To hear more from the chief economist, click here.
