Unfortunately, we’re seeing another concerning conflict in the world. While it’s obviously very sad due to lives lost, injuries, stress, and damage across the Middle East, as with all geopolitical events, there is little we can do about it. The thing we can control is how much it controls us.
“Stay informed”
The guaranteed thing about any large-scale event is how many sudden experts there are. And there are so many different angles. There’s the conflict itself, military intelligence, the wider geopolitical implications, energy, tourism, and insurance, just to name the most obvious.
Your guess is as good as ours in respect to who to believe and what’s going to happen. Plus, there’s a lot of “ten moves ahead” type arguments flying around.
For example, one that sounded interesting (for a brief moment) was that President Trump had captured Venezuela’s Nicolas Maduro and taken out the Iranian leadership because China sourced a large amount of oil via Venezuela and Iran, under the guise of it coming from other countries. Cutting off that oil supply would put pressure on China, force it to use more of its reserves and they may rethink any designs they had on Taiwan.
It seemed like an interesting theory. Iran’s response to being bombed was to essentially make the Strait of Hormuz unpassable. Estimates say 13 million barrels of oil a day pass through the strait, and no one will send a tanker through if they’re likely to be targeted, nor will anyone insure them. So that oil is cut off to everyone.
In response, President Trump announced the US would escort tankers and ordered the US Development Finance Corporation to immediately offer reasonable rates of insurance so ships could have confidence to pass. Much of that oil that would have been stuck is being insured by the US and will end up in China regardless. The US is now insuring oil shipments to China, but subsequently China has suspended diesel and gasoline exports, indicating they may have concerns about energy supply.
This example is why it’s best to limit the attention given to such events, lest we get overly consumed. The media likes to say “stay informed” by listening to them and makes a point of saying “this is what you need to know”, but it’s a ploy to make us feel like we need to pay attention. There’s no need to do that, unless we have friends or family in the region and they could probably offer us better updates than the media!
A good amount of the coverage of any major event will be the same details recycled over every news service. The analysis will be speculation, opinion, theories and guesses. Then there’s the Trump factor. Neutrality is always the optimal position, but President Trump is a lightning rod who prompts reactions and biases which cloud things. This feeds across the media.
Turn off the mainstream media, switch to social media, and you’ve got people who’ve generated AI videos claiming it’s the latest news. Entertaining, but not reliable.
Energy
Setting aside the guesses on what the true motive is behind the bombing, the US move to protect and insure shipping traffic is a significant one because the biggest risk in all this is a spike in oil prices. Not just a spike to $75 or $80 for WTI or Brent Crude, figures we’ve seen multiple times in the past three years, but a serious spike. $150 to $200 a barrel. That would gum up the global economy very quickly.
There is varying analysis on what scenarios could push the oil price up. Goldman Sachs commodities strategists said the worst-case scenario would be a one-month closure of the Strait of Hormuz. They forecast that would send the oil price up $14, which has almost been priced in already. At Bank of America, the forecasts from their commodity strategists were more dire, suggesting $40-80 a barrel increase in brent crude if the strait saw a prolonged closure. JP Morgan strategists suggested $120 a barrel for brent crude if the war lasted three weeks and gulf producers were forced to shut in production. Finally, Deutsche Bank saw $200 a barrel if the strait was closed with mines and anti-ship missiles.
All very interesting, and you can see the range of forecasts is wide, but all these forecasts were made before President Trump signaled intent to protect the Strait of Hormuz. Underlining a key point: no one can see the future. We can all imagine scenarios, but scenarios never account for every possible variable. Cast our minds back to the outbreak of Covid and it was the people with the doomsday scenario in their minds that lost out. They didn’t account for governments and central banks providing unprecedented monetary and fiscal stimulus.
Your Portfolio
Your adviser also doesn’t know what is going to happen in the world, but they do know you, your circumstances and your goals. That informs your portfolio and the risk taken. They know uncertainty is never heightened. It’s simply reality. The future is uncertain. That’s why it’s important to be globally diversified with risk weighted to your circumstances.
History shows there’s usually one or often two events a year that kick off. The market will be concerned for a few days, a few weeks, or a month, maybe longer. Will this be a short concern or a long concern? Can’t say. That’s why we don’t react. No reaction, just the same actions year in, year out. Stick to our asset allocation, harvest gains according to the plan. That’s our pre-determined targets or portfolio weightings. Your adviser has already worked this out.
Our portfolios have seen plenty over the years, but left alone, stocks offer long-term exposure to innovation and productivity gains, while high-quality bonds help buffer portfolios during market volatility. Flipping a portfolio on its head in response to pessimistic outlooks may feel smart, but it usually leads to poor decisions made at precisely the wrong time.
There will be ongoing costs from this conflict. Driving will become more expensive, inflation will be hanging around, interest rates and bond yields will likely be going up before they go down. Electricity may cost more. Markets will be volatile.
Any good news?
We live in Australia.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
