Chief Investment Officer
Summary: The dramatic situation in Israel after this weekend's attacks could prove a geopolitical game changer. While the fog of war makes any predictions on what might happen next impossible, the situation should be at the center of our attention as we hope for peace, while also considering the possible impact on financial markets and our portfolios.
This weekend’s attack by Hamas into Israel has now cost at least 1,100 people their lives. 700 in Israel and 400 on the Palestinian side. The situation is tense and many are already calling it the 9/11 of Israel.
There is no doubt for us that the next month or two will see increased focus on the Middle East and the consequences of the situation for energy, politics and especially the dire situation for civilians on both sides. This note is only an attempt to gauge the impact of the situation on financial markets, not to comment on the conflict itself. Rest assure we are as concerned as anyone for the well being of innocent civilians across the region.
The Middle East is of course a key provider of both oil and gas and via the Suez Canal also a critical transport hub for global containers and energy.
The macro impact:
Market Comment: Market concerned about the scale of not only operations in Israel’s immediate neighborhood in the Palestinian territories and Lebanon, but also the risk of escalation with Iran due to its sponsorship of forces hostile to Israel. Hence the focus will be on anything Iranian: new political initiatives, sanctions, risk of retaliation on Iran’s infrastructure and general news. Two days into the conflict the big actors China, Russia, Saudi Arabia are all indicating and expressing the need for a peaceful solution. This is good news, but behind the scenes, no one doubts that Russia and Iran have an openly friendly relationship and both support, indirectly or directly, Syria, Hamas, Hezbollah and the PLO.
Fixed Income: 2y government bonds remains our go-to investment depending on your currency region – German 2-year bonds for euro investors, US 2-year notes for USD-based investors and 2-year Gilts for UK-based investors.
Equities: Long Energy, defence stocks (unfortunately), cybersecurity, infrastructure and semi-conductors will be overweight sectors. This is not a new allocation for us. Peter Garnry has been highlighting these baskets for all of 2023.
Concerns related to Russia's intentions
Among macro players there is a strong suspicion that that Russia may look to weaponize energy this winter:
Finally, a personal comment from a veteran in global events. I have not been this nervous in my whole career. Yes, I am definitively of the “sceptical kind” but this weekend events hit harder because:
All in all, be careful and remember standing up for democracy means not only accepting the vote of the majority but also protecting the minorities.
Safe travels,
Steen
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