The U.S. – Iran conflict … What it Means to Investors
Since the U.S. killing of Qassim Suleimani and the Iranian retaliatory missile strike against U.S. military facilities, the situation between the two countries seems to have de-escalated. Although experts don’t believe that a war is likely to break out at this point, it is important to understand the potential effects that such a worst-case scenario would have on the markets.
War usually leads to a bear (negative) market.
Analyzing the last 28 bear markets (between 1915-2018) there has been a solid link between war and a bear market. War was not always a factor when the markets turned negative (only about 30%) but, when there was a conflict a bear market followed about 80% of the time. This has been especially true for conflicts that have threatened oil supplies in the Middle East.
But stocks have tended to rebound relatively quickly.
Looking at the performance of stocks over six wars during this time (WW1,WW2,Cuban Missile Crisis, Yom Kippur War, Kuwait War and the Iraq War) the U.S. stock market bottomed within 12 months of the tension becoming apparent (usually before the war breaks out), and, more importantly, typically returned to its pre-conflict level within 18 months.
It should be noted that the world today is not as dependent on Middle Eastern oil as it has been in the past. The world economies are simply less dependant on oil in general; they are less energy intensive now, in comparison to few decades ago. In addition, the U.S. has dramatically increased its own production of oil. These factors could mitigate any negative economic effects resulting from a major conflict between the U.S. and Iran.
What could an on-going conflict between the U.S. and Iran mean for investors?
If the situation continues to worsen, investors can expect to see an impact on various asset classes, some may include:
A sell-off in risky assets would be likely, especially the stocks of energy-intensive companies and markets in the Middle East.
Asset classes such as Gold, the Japanese yen, Swiss franc and U.S. Treasuries (US$) which are all considered ‘safe havens’ would all likely preform well.
Although the world is less energy-dependant on the Middle East, we would likely see a significant rise in the price of oil, and out performance in sectors like oil & gas and utilities.
Low Volatility stocks would most likely outperform; as would be expected in times of volatility.
Among the emerging markets, energy users such as China and India would likely underperform non-Middle East energy produces such as Russia and Mexico. The Russian stock market could benefit significantly as it is heavily weighted in energy sectors where the stocks have been considered cheap. A war could also benefit the Mexican peso and Russian ruble.
U.S. high yield bonds may hold their ground; this asset class could be hurt by heightened volatility, but it has a significant weighting in the energy sector, which could help it.
It is worth mentioning the U.S. Federal Reserve and many other central banks are ready and willing to react quickly to keep any market sell-off short and shallow. In addition, many believe the tensions between Iran and the U.S. will continue; but will remain contained and that an actual war is highly unlikely at this time.
Have a great weekend,
Tracey
Source: original article by Kristina Hooper, Invesco Canada blog post 01-14-20
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