Israel – Hamas war

In recent weeks, we’ve written about the concept of ‘chaos’ and the need for investors to accept that fast-changing and unpredictable global events are part-and-parcel of investing. Despite this, few could have been prepared for the tragic events that unfolded in Israel over the last few days.

The eruption of violence in Israel means that the 7th October 2023 will be as indelible in the country’s history as the 11th September 2001 remains for the US. The world of investments is of course trivial in the context of this multiplying tragedy for Israelis and Palestinians. Nonetheless, below is an attempt to make sense of the world economy and capital markets that these recent events leave in their wake.

Market outcomes

So far, the response from markets indicates that the primary impact is being felt via oil supply. Neither Israel nor Palestine are important oil producers. However, Iran is, as is Saudi Arabia of course. For both of these important producers, the conflict is likely already influencing their incentive to supply, and in the case of Iran, the world’s willingness to accept their barrels.[1]

At the time of writing, the price per barrel of brent crude was again approaching $90 a barrel. That is not yet at levels that will alarm central bankers in the developed world. However, they, like everyone else, will be watching closely to see what comes next.

High on that list will be those interested in the outlook for US consumers (which is all of us of course). Apart from anything else, gas prices will almost certainly be an important issue in the run-up to US presidential elections next year.

It is possible to suggest that the events of the last few days in Israel and Palestine, the grinding tragedy in Ukraine and other flaring hotspots are a taste of what the world looks like amidst fading US hegemony.[2]

Perhaps, though we should be wary of the catch all theory. These ‘mega theme’ explanations are often of little use to investors - There are surely a cocktail of ingredients that have led us to this moment. Their precise hierarchy of influence may only be established with years (and years) of hindsight.

Investment conclusion

We usually try and portray the world, and the capital markets that reflects her outlook, as an unevenly improving place - Steady but unheralded gains in most important living standard metrics, co-mingling with higher returns from investments over time. Technological change is the most important cog in both of those stories. That sunnier long-term outlook certainly feels more distant right now.

There are risks that a glass half full approach to the future could look even less appropriate in the days and months ahead - there are surely scenarios where this becomes a much wider, and much more dangerous conflict. However, the cold reality is that the global economy beats to many drums, with or without warfare.

For investors it’s important to try and keep a sufficiently open mind – not only as to what could go wrong, but also where the understandably gloomy consensus is underestimating what could go right. That will often mean trying to tune out the overconfident (often overnight) geopolitics of the finance industry. In the meantime, our thoughts are with everyone impacted by the current conflict.

(And if you want more attempts at clarity amid the ever changing investments landscape, don’t forget to subscribe to our weekly ‘Word on the Street’ podcast.)

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*This article is for information purposes only. It is not intended as a product offer or investment advice

[1] https://www.theguardian.com/business/2023/sep/25/the-trade-in-sanctioned-oil-is-booming-as-the-us-turns-a-blind-eye

[2] https://www.noahpinion.blog/p/youre-not-going-to-like-what-comes