Here’s what experts make of the US-Iran tensions and what they mean for markets
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With the exemption of the first two weeks of August, 2019 was a solid year for the markets and 2020 was set to be another one.
As Bloomberg Intelligence analyst Jamie Murray told clients this week, investors anticipated two things this year — first, a phase one trade deal between the US and China and second, interest rates to remain low with the effect continuing to kick start the economy.
But now investors have a new crisis to contend with — the escalation of tensions between the US and Iran. While armed conflict in the immediate future has appeared less likely in the last couple of days there has been reaction.
Some commodities, particularly gold and oil, rallied earlier this week, as did plenty of ASX stocks involved with these commodities, however equity indices have overall remained stable.
Nigel Green, CEO of deVere Group, said investors should monitor the situation and how it played out. He also advised against panic selling or short-term buying.
“In terms of what investors should do against a fast-moving backdrop with many potential and far-reaching consequences, it is not ‘sell in a panic’, or the opposite reaction: ‘buy excessively’,” he explained.
“It’s almost impossible to forecast what the market is going to do in the immediate future – and it is much too early to say what happens next and how investor sentiment will affect markets.
“However, what we do know is that over the longer-term the performance of stock markets is fairly predictable: they go up.
“As such, it is best to just feed the money in over time in a measured way in order to take advantage of the long-term trend of stock markets to deliver long-term capital growth.
“History has shown us that panic-selling or panic-buying can be potentially financially damaging for investors.”
But on the other hand, investors don’t necessarily need to sit on the sidelines, according to Green.
“[Investors] need to ensure that their portfolios are properly diversified by geography, industrial sector and asset class in order to manage risk, to navigate the increasing volatility and also to take advantage of potential opportunities when they arise,” he said.
“If their portfolio is indeed well-diversified, for the time being at least I would urge investors to remain cautious and consistent. If portfolios are not properly diversified, recent events could serve as a wake-up call to reposition.”
Commentators are of the view that a full blown war will not eventuate.
Sandhill Strategy analyst Katie Bays said “the bark may have been worse than the bite”.
But even if war does not eventuate, she warned of two other potential consequences.
First, Asian energy supplies falling if the Strait of Hormuz suffered disruption. Twenty million barrels per day transit this passage and 76 per cent goes to Asia.
Second, despite Europe having appeared less willing to follow President Trump on Iran, it would likely re-impose its own sanctions.
Nevertheless she believes fully-armed conflict is unlikely. She argued that in a democracy, successful war needed military might, economic might and public support.
“The US may have the first two components, but the overwhelming majority of Americans, including 63 per cent of Republicans, do not want the US to engage in armed conflict with Iran,” she said.
“President Trump knows this – he will avoid war as long as it is practicable to do so.”
The US-Iran tensions have led to investors putting aside the trade war – for now.
After months of promises, President Trump signalled January 15 would be the date the two nations would sign the phase one trade deal.
I will be signing our very large and comprehensive Phase One Trade Deal with China on January 15. The ceremony will take place at the White House. High level representatives of China will be present. At a later date I will be going to Beijing where talks will begin on Phase Two!
— Donald J. Trump (@realDonaldTrump) December 31, 2019
But China has not yet confirmed and state media argued there was no rush to sign a deal.
Michael Every from Rabobank said this could just be a last minute negotiating tactic. But on the flip side it could be a hint the sides aren’t seeing eye to eye.
“This comes down to either theatre from China, or the US and China going back to the theatre of trade war,” he said.
“That should be injecting a high degree of uncertainty into markets – but Iran obviously just eclipsed them.”