Middle East tensions boost defensive sectors

Key points in this equity note:

• Hamas’ attack on Israel could be defining moment for Israel and potentially the wider regions depending on how Israel chooses to respond.
  
  
• The reaction in financial markets has been a slightly stronger USD, higher gold prices, higher crude oil prices, and lower equities.
  
  
• Within equities the four defensive sectors (energy, utility, consumer staples and health care) are all higher and within our theme baskets we expect a positive price reaction in defence, cyber security and logistics.

Potentially a defining moment for Israel and the Middle East

Hamas’ large-scale attack on Israeli civilians over the weekend and the subsequent retaliation from Israel’s military in Gaza is a human tragedy. Geopolitically the attack on Israel has already been touted as Israel’s 9/11 and the geopolitical paths from here are wide and uncertain. The path from here will be defined by how Israel responses in the medium term. With the spotlight already turning on Iran, that has potentially directly or indirectly been helping Hamas training and plan this attack, it could turn out to be a defining moment for the Middle East and also the role of Saudi Arabia that has spent years setting itself up as the region’s superpower.

Defensive sectors are bid in equities

The reaction across markets has been that of slightly higher USD, lower US bond yields (indicated by futures trading as the physical bond market is closed today), higher gold prices reflecting both a geopolitical risk premium and the potential for lower real rates in the short term, Brent crude up 2.5% after being up as much as 5.5% compared to Friday’s close, and equities lower with defensive sectors rising. As the table below shows, the four defensive sectors (energy, utilities, consumer staples, and health care) are all up today which consumer discretionary, financial and information technology sectors are the worst performers.