Piers Hiller, Chief Investment Officer
The United States and Israel launched air strikes against Iran on Saturday. Iran responded by firing missiles and drones at US assets and allies across the region, including Israel, Bahrain, Kuwait, Qatar, the United Arab Emirates and Jordan.
Maritime activity in the Strait of Hormuz, a critical artery for global oil supplies, has been severely disrupted amid fears of further escalation. The conflict has caused a sharp, though not economy-threatening, rise in the price of oil. Meanwhile, gold, a safe haven asset, has also risen. Equities are, so far, only moderately weaker, perhaps signalling that markets expect the conflict to remain relatively constrained.
It is at times like these that the benefits of active fund management come to the fore. While closely monitoring market reaction, our managers are also looking to the long term. In this article four of our fund managers provide their views. We shall bring our clients more insights as the situation develops.
We hope that Jupiter's clients in the region, and their families, are safe and well during this difficult time.
Ariel Bezalel and Harry Richards, Investment Managers, Fixed Income
Questions are being raised about how the conflict will pressure inflation. That entirely depends on how high oil prices rise and how long the war lasts. If it is a short, sharp war, oil prices could quickly slide back to manageable levels.
If oil prices remain at high levels (for example, if prices increase by 15–20%), that will be a concern. Disruption to the free flow of goods through the region could also potentially add to any inflationary shock if the conflict persists.
It is not just Israel; other countries in the region, such as Saudi Arabia and the UAE, have been frustrated by Iran for a long time, as Iran’s proxies — such as Hamas, Hezbollah, and the Houthis — have long fomented trouble in the region. Iran has now directly targeted these countries by firing missiles and drones. A Saudi oil field has been hit, and a UK base in Cyprus has also been attacked. While the US may be hoping for a contained engagement, there is concern that the conflict could widen and draw other affected countries in the region into the war. It is important to note that China buys almost 80% of Iran’s oil, and the conflict could constrict supplies to China. There is a huge amount of uncertainty at the moment, and we will be keeping a close eye on how the situation develops.
While Israel’s military intelligence has proved to be very effective, the Iranian regime will do everything it can to survive. We should not underestimate the regime’s determination to survive. The immediate question is whether any country will come forward to broker a deal. Qatar and Oman could be potential candidates, and it remains to be seen whether Iran is willing to accept any deal.
As far as the fixed income market is concerned, we have seen a slight steepening of the US yield curve as investors worry about inflationary repercussions and funding costs.
Amadeo Alentorn and Matus Mrazik, Investment Managers, Systematic Equities.
The events are, of course, very troubling on a human level, and our thoughts are with our clients who are in the region.
Turning to the effect on markets, thus far the equity markets’ reaction has been fairly muted. Equity markets have fallen modestly. Some of the muted response reflects anticipation. We carefully take the temperature of markets, to assess investors’ sentiment. Investor uncertainty has already been elevated this year. The current situation can only add to uncertainty.
In circumstances such as these, a dynamic approach to investment helps. We employ both long-term and short-term signals, and our model rotates between different investment styles, as needed.
Jason Pidcock, Investment Manager, Asian Equity Income
Asian markets ex-Japan are down but not significantly, and we’ve seen many days with similar market moves. Overall, this doesn’t change the story for Asia -- the rise in the oil price so far isn’t going to crimp growth in Asia. However, China is a key customer for Iranian oil, and so China could be impacted. From a market point of view, we are relaxed and think on a long-term view it could be more positive than negative. The oil price is up but not that much, in part because this event has been well flagged. I don’t think anyone is particularly surprised that this has happened -- we are not.
I think it’s quite telling that gold price has rallied – as we write, gold has risen more than the dollar. In past crises, people would have flocked to the dollar, now they are flocking to gold, and gold may be showing itself to be a key safe-haven currency.
While the events look messy today, a case can certainly be made that if the Middle East is minus a threatening / troublemaking Iran, it is more likely to thrive and to be a much more peaceful place.
Alastair Irvine, Investment Director, Jupiter Independent Funds Team
Despite all the talk of regime change from Trump and others, it seems clear to me that there is no plan here. It is very difficult to see how you can bomb a country, remove its leaders, and then just expect its people to form a stable new government. The examples of Libya, Syria, Iraq and Afghanistan show that the real world is much more complex than that.
Do the current leaders of the US and Israel have the appetite for long-term nation building in Iran? Trump is talking about this as a four-week operation, but the US and Israel have just destabilised a country spanning the entire landmass between the Caspian Sea and the Gulf, the epicentre of what is already the world's most volatile region. Iran has already lashed out with attacks against its regional US-aligned neighbours, perhaps hoping they will put pressure on Trump to back off, and the regime will do everything it can to stay in power. What happens from here is impossible to predict with certainty, but this is unlikely to be a short and contained conflict.
While the focus is on oil and the disruption to flows through the Straits of Hormuz, depending on the duration of the conflict the dislocation to global supply chains if shipping is threatened in the Red Sea could have a wider economic effect. We’ve already seen the oil price rise and global stocks fall, as one would expect – but much now depends on how events develop. The initial strikes by the US and Israel have been dramatic, and they will see the death of Ali Khamenei as a victory, but although they certainly seem to control the skies above Iran they do not control what’s happening on the ground. What Trump has ‘unleashed’ (a favourite word of his) over the weekend could be a longer and more complicated campaign than he wants it to be.
Adrian Gosden, Investment Manager, UK Equity Income
We are closely monitoring the situation in the Middle East, and we have experienced many market-moving events during our investment career. If this conflict causes markets to be weak for an extended period, this could present opportunities for investors to build positions in good companies trading at unusually low valuations whose businesses aren’t directly impacted by the war.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
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