Global investors are now facing the reality that intensifying geopolitical risks could be a long-term phenomenon, with the potential for an oil shock becoming more probable. According to a strategist from BCA Research, there is a growing chance that the ongoing conflict in the Middle East could expand into oil-producing regions such as Iraq, the Persian Gulf, and Iran. This development has significant implications for financial markets and the global economy.
Despite the tensions in the Middle East, financial markets have remained relatively stable, with investors and traders primarily focused on the absence of a ground invasion by Israel so far. However, BCA Research recognizes a secular trend of rising geopolitical risks, driven by challenges from Russia, China, and Iran to the existing world order. These risks have been heightened by Iran’s proxy war with Israel, Ukraine’s struggle against Russia, Taiwan’s upcoming election in 2024, and the potential return of former US President Donald Trump as a presidential candidate.
The combined instability in the Middle East and Russia’s energy weaponization raises the likelihood of a significant oil supply constraint in 2024, which could have profound implications for the global economy. While the Biden administration will seek ways to increase oil production, its options are limited. Without a new US-Saudi strategic understanding, Saudi Arabia may not be able to adequately increase production either, leading to potential supply shortages.
These geopolitical uncertainties have prompted some experts to draw comparisons to the 1970s oil crisis. However, others argue that a similar crisis is unlikely to occur. Consequently, investors have been flocking to traditional safe havens such as gold and Swiss assets. Both gold and the Swiss franc have experienced significant rallies since the beginning of the Middle East conflict, highlighting the demand for safe-haven investments in times of geopolitical instability. Additionally, Swiss government bonds have seen substantial returns during the same period.
Regional equity markets, especially Israel’s market, have suffered as a result of the geopolitical tensions. The MSCI Arabian Markets and MSCI Israel indexes have both experienced declines since the start of the conflict. These market movements reflect the macroeconomic and geopolitical environments.
Looking ahead, investors should anticipate further deterioration of the geopolitical context, suggesting that oil and gold prices are likely to continue appreciating in the short term. Over the medium term, high-quality government bonds, including long-dated US Treasuries, could benefit from slowing economic growth, disinflation, and geopolitical risks.
In conclusion, the global investment landscape is facing increasing geopolitical risks, particularly in the Middle East. The possibility of an oil shock and supply constraints looms, affecting financial markets and the global economic outlook. Investors are seeking safe havens such as gold and Swiss assets, while equity markets in the region have experienced declines. The upcoming months will likely see further geopolitical challenges, emphasizing the need for cautious investment strategies.
