October has seen tragic events unfold in the Middle East. The conflict between Israel and Hamas that controls Gaza have quite rightly drawn the world’s focus to immense human suffering. There have been thousands of civilians killed in just the first few days alone, with many times more injured and whole communities displaced. With tensions in the region running high, there is a risk of the conflict escalating.
When considering the impact on the investment landscape and our weightings in different types of investments, with any war, we must consider its ability to impact global investment markets. Who is at war? How long could it last? What is the likelihood that conflict will stay contained or escalate? What are the broader regional and global economic consequences, for example, disruption to global trade?
Another factor to consider at times of war, and especially so in the case of localised conflicts as is currently the case in the Middle East, is that there are always other economic and financial market forces acting. Separating out these investment drivers is critical to understanding the broader investment climate. While the global economy is facing persistent underlying inflation pressures, they are well below their cycle peaks and continuing to ease. Central banks have raised interest rates significantly from post COVID lows and now interest rate cuts are expected by the end of next year in the UK, US and Europe.
One of the major contributors to inflation is the oil price. The oil price rose by around a third from early June to late September this year, reaching a recent high of over $97 per barrel (for Brent crude). This rise was principally on the back of voluntary supply curbs from Saudi Arabia and Russia, though it subsequently eased back to close to $84 a barrel in early October on concerns that interest rates in advanced economies might have to stay higher for longer should inflationary pressures re-emerge. As it stands, despite the breakout of a fresh war in the Middle East, the oil price at around $90 per barrel is below the highs reached in 2022.
While investors are rightly focused on fast-moving events in Israel and Gaza, currently we are also in the middle of the latest quarterly company results season, alongside an important time for central banks seeking to balance inflation risks versus economic risks. At the same time, estimates for US households’ accumulated excess savings have been sharply revised higher in recent weeks, complementing a picture of still-significant excess savings for consumers in many other countries globally. Coupled with resilient labour markets, where inflation-adjusted wages are starting to grow again, all in all this suggests a relatively healthy economic backdrop for shares. Meanwhile, shares look reasonably good value on an historical basis, currently sitting a little under their longer-term 30-year average based on the ratio of price to earnings per share.
This all said, we cannot predict the outcome of events. Should the current conflict in the Middle East turn into a broader regional war, the balance of risks to the broader economy would clearly shift, which may warrant a more defensive positioning of investment portfolios. It is a reminder to stay humble and vigilant to how events might yet turn.
At the current time, the challenge is how to take a calculated position so that we maintain exposure towards more than one economic scenario materialising. Simply, there is not enough visibility currently to decidedly shift our investment weight behind a single expected sustained outcome. Instead, staying invested with a modest preference for shares over bonds, but keeping balance between growth and value investment styles within the shares portion of portfolios, continues to be our goal.
