Middle East tensions boost defensive sectors Middle East tensions boost defensive sectors Middle East tensions boost defensive sectors

Middle East tensions boost defensive sectors

Equities 5 minutes to read
Peter Garnry

Head of Equity Strategy

Summary:  The awful events over the weekend in Israel is potentially a defining moment for Israel and the entire Middle East. Markets have responded by pushing the USD higher, gold higher, Brent crude higher, and equities lower. Within equity markets the four defensive sectors (energy, utility, consumer staples, and health care) are up today while consumer discretionary, financials and information technology are the worst performing sectors. Across our equity theme baskets we believe the weekend's events will boost the baskets such as defence, cyber security, and logistics.

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.

Brent crude continuous futures | Source: Saxo
STOXX 600 sector table | Source: Bloomberg

Equity theme baskets in focus

The events in the Middle East could amplify the fragmentation game dynamics which means more closed supply chains and de-risking between countries. As we explained in our quarterly outlooks and research notes here, the fragmentation game is an underlying source for structurally higher inflation compared to the past as fragmented supply chains and production closer to the US and Europe means higher costs of production.

In terms of our theme baskets, the themes we expect to see higher equity valuations are in defence, cyber security and logistics. The positive tailwind for the defence industry is obvious as the backdrop will underpin the need for larger military spending in Europe and the US. Cyber security is a natural extension of warfare and with the rising geopolitical risks in the world and states involved in cyber security attacks this is a key priority among companies and governments. Logistics stocks could be bid because the conflict is raising the risks around using the Suez canal as a transport route and some shipping companies in crude oil, LNG, and containers (consumer goods) might re-route south of Africa making transportation more expensive.
Saxo's defence theme basket | Source: Saxo

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