Experts urge investors not to reposition portfolios in wake of 'inferno' Iran-US crisis
Oil and gas stocks rise amid escalating tensions
US President Donald Trump's missile attack on Iran, killing Major General Qasem Soleimani, has "transformed a simmering but manageable pot into an inferno", according to one investment professional, but the industry is urging investors not to reposition portfolios in the wake of the Iran-US crisis.
Since the incident, Iran has retaliated by launching a missile strike at Iraqi air bases housing US forces, in what it described as an act of self-defence.
The US followed suit with a letter to the UN describing its killing of Soleimani as an act of self-defence and announcing it is "ready to engage without preconditions in serious negotiations".
Commodities boost
The spot price of Brent Crude oil spiked at over $70 per barrel as a result of the strike, rising more than 5% from its year-end value, but has since corrected to $66 per barrel at the time of writing.
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COMEX gold's spot price also spiked in the immediate wake, rising to more than $1,600 per ounce, but remains over 7% short of its September 2019 peak, according to FE fundinfo.
While the flotation of Saudi Aramco broke the record for the largest IPO in history when it debuted on Saudi Arabia's stock exchange on 11 December 2019, surging briefly to $2trn the following day, it has seen more than $200bn slashed off its value since the assassination.
Closer to home, Shell and BP, which together comprise 14.9% of the FTSE 100, mirrored oil price movements, reaching a peak before correcting, but remain higher than their year-end valuations.
Geopolitical risks are rising - but oil markets dismiss them
The UK's blue-chip index is particularly dependent on the energy sector, with a 14.9% exposure, compared with Europe ex-UK's 3.8% and 5.2% globally, according to MSCI.
While the Iran-US conflict has briefly impacted the oil price, Ayesha Akbar, multi-asset portfolio manager at Fidelity, reminded investors: "We saw sub-$30 per barrel prices as recently as early 2016, and up to $146 in 2008," suggesting the $70 per barrel price should be viewed in perspective.
Meanwhile, Jonathan Waghorn, co-manager of the Guinness Global Energy fund noted: "Iran's exports are already down from two million barrels per day to 0.5 million barrels per day thanks to sanctions, so there is not that much further to fall".
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The more immediate threat to oil prices, according to Sebastien Galy, chief macro strategist at Nordea Asset Management, is a blockade of the Strait of Hormuz, the 21-mile-wide strategic ‘choke point' between the Persian Gulf and the Gulf of Oman.
But while this is "a viable threat to the US", the state of Iran's naval power means they do not have "the ability to execute it for long," he said.
Jim Wood-Smith, CIO for private clients and head of research at Hawksmoor Investment Management, said despite protestations to the contrary, the US has indeed declared war on Iran.
The opportunities in the Gulf markets
"What we have now is new risk: partly the price of oil, and partly from however else this situation is going to escalate," he warned.
Avoiding rash decisions
In spite of potential headwinds on the horizon, Fahad Kamal, chief market strategist at Kleinwort Hambros, disagrees with the "easy conclusion" of positioning defensively during times of heightened stress.
"Financial history teaches a different lesson: geopolitics rarely impact equity markets over the next year or so," he reasoned.
"For example, the world was brought to within an inch of nuclear armageddon during the Cuban Missile Crisis in October 1962, but the S&P 500 was up 7% in the following month, up 16% over the next quarter and up 34% a year later".
Akbar agreed and cautioned "against jumping to any conclusions on the direction of oil markets".
That said, some professional investors believe investors must remain cognisant of potential risks when it comes to investing new money.
Juliet Schooling Latter, research director at Chelsea Financial Services, said: "We have not repositioned our investments as such, but it is informing our decisions about how we invest new money. For example, we have not added to our India exposure, as it is negatively affected by a rising oil price."
Over the medium term, opinion is divided on the geopolitical outcome, with some predicting an escalation bringing Israel, Yemen, Lebanon and Gaza into unrest.
For the markets, however, consensus seems to be business as usual, according to Kamal: "For all the social angst, geopolitical crises simply do not appear to affect markets often."
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