What War Means for Investors
Is War About to Crash the Stock Market?
Uncertainty looms over stocks.
Marcus Padley | 4 October 2024 | Education Corner
The oil price is up 4.4% (Brent) and 5.0% (WTI) overnight as Biden (getting election eyeballs) has escalated the risks, saying Israel is considering targeting Iranian oil assets. It’s not hard to do; there is one port that handles 90% of Iran’s exports.
Uncertainty and the Stock Market
War equals uncertainty, and uncertainty is not good for equity prices. I do feel like we are poised at the top here, waiting for something to go wrong, and this might be it. It’s “stand back” time. A good moment to go risk-off rather than risk-on.
If you
want a bit of risk, you might try to trade SNAS today.
Defensive Stocks During Uncertainty
Uncertainty is good for the
relative performance of defensive (boring, reliable) stocks. If the market tips, you’ll see CSL, WOW, TLS, and all the other dull stocks and sectors holding up. You wouldn’t buy them for outperformance unless you were an institutional fund manager judged on relative performance to a benchmark.
Safe Haven Assets in Times of War
War is good for safe-haven assets such as gold and bonds. I think we’ve missed gold in the Strategy Portfolio. We don’t trade bonds.
Oil and Defence Contractors in War Times
War is good for the oil price and defence contractors. Oil is the trade if you can be bothered to take it. I would only be buying an oil price trade if I thought this was a
material pivot point in the oil price. (I listed the oil plays yesterday).
I doubt this is a material turning point in the oil price. May be wrong if it really escalates – if US jets are suddenly in action. But outside of that, the oil outlook beyond the current tension is not great, with the Chinese economy fading (yep, not sure the recent measures will achieve much more than a sentiment boost), and with Saudi Arabia warning about a $50 oil price if OPEC members continue to flout production agreements.
Saudi Arabia and the UAE are capable of turning the taps on to more than cover a complete annihilation of Iran’s oil production. Iran produces about 3.9 million barrels per day, and Saudi Arabia and the UAE are “underproducing” by 4.3 million barrels per day. So, we haven’t bothered to make a trade here. Short-term traders will.
War and Political Gains
War is good for politicians. Those of us who have been around will remember Margaret Thatcher’s election hopes being resurrected (from the dead) by the Falklands War -
click here. It’s a little bit like COVID for politicians; they have an excuse to get a lot of airtime. Just ahead of a US election, it is perfect timing for Biden and Harris. No one wants to hear what Trump has to say at the moment.
War and Stock Markets
War is not necessarily bad for the stock market. The Ukraine war is ongoing, and all markets are hitting all-time highs. Interestingly, those of us that have been around will remember that the stock market bottomed almost the day Bush started the Iraq war in March 2003, after a long period of uncertainty (will they, won’t they). It’s the uncertainty that hurts share prices; in 2003, the war ended a lot of uncertainty.
IMF Warnings About War
The IMF has warned that war will have “significant economic implications for the region and beyond.” They are talking more about the Middle East than the rest of the world, and it’s already having an impact—Israeli GDP dropped 20% last quarter. Plus, the IMF economists are not quite the top echelon of economists in the world. The truth is that war is a medium-term positive for most economies.
Final Thoughts
Bottom line – Trading on the escalation of war is a trade, not an investment. You are trading for a spike in the oil price. So far, so good on that. Don’t forget to take a profit.
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