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The CIO of ABG Private Banking: The duration of the conflict will determine market direction
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The energy market remains in focus following sharp fluctuations in oil prices. At the same time, the fundamental outlook for both the economy and corporate earnings remains relatively stable. ABG Private Banking’s Chief Investment Officer, Jonas Andersson, comments on recent developments and the key risks ahead.
The escalation in the Middle East over the weekend left a clear mark on the energy market and triggered significant movements in financial markets. Brent crude oil briefly rose to around $119 per barrel on Monday before falling back to approximately $87 later in the evening – a clear example of how quickly sentiment can shift in an uncertain news environment.
Equity markets initially reacted negatively after the weekend. Major Asian indices all closed lower, with Japan’s Nikkei and South Korea’s Kospi falling by around 5-6 percent. In Europe, the Stoxx 600 index declined by about 0.7 percent, while Sweden’s broad OMXSPI index closed down roughly 1.7 percent.
However, by Tuesday morning, sentiment had turned positive again, with clear gains across markets in Asia, Europe, and Sweden.
“Asia is more dependent on imported energy than many other regions. When oil prices rise rapidly, it directly impacts growth expectations there”, says Jonas Andersson.
Oil price determines the risk outlook
How severe the economic consequences become will largely depend on the trajectory of oil prices.
“Historically, oil prices typically need to roughly double from the start of a crisis before they significantly damage the business cycle. At current levels, that would imply prices closer to $150 per barrel”, says Andersson.
At the same time, there are factors that could mitigate the impact. The U.S. and China, for example, could release oil from their strategic reserves to stabilize the market in the event of a shorter disruption. The main risk point remains the Strait of Hormuz. While it is not formally closed, risk levels are very high, and the insurance market has become significantly more restrictive, creating logistical challenges for energy shipments from the region.
Duration of the conflict is key
For markets, the length of the conflict is critical.
“If the conflict lasts weeks rather than months, central banks will likely look through a temporary rise in inflation. If it becomes more prolonged, the picture changes significantly”, says Andersson.
A sustained higher oil price risks slowing the global economy by reducing household purchasing power while also creating new inflationary pressures.
Fundamentals remain stable
Despite increased uncertainty, Jonas Andersson still sees relatively stable fundamentals for the equity market.
“We still see solid earnings growth this year, and therefore my overall view of the equity market has not fundamentally changed”, says Andersson.
After a period of strong performance, ABG Private Banking’s investment team recently taken some profits in emerging markets. In more uncertain periods, certain assets tend to act as portfolio hedges. Gold has continued to function as a classic safe haven, while a stronger dollar has mitigated the decline in global equities when measured in Swedish kronor. The team also continues to see opportunities in U.S. technology stocks after valuations have come down.
Volatility likely to persist
The conflict has so far lasted just over a week, yet market movements have already been significant.
“Wars are easy to start but difficult to control and end. We should expect continued volatility, but also that a turnaround can come quickly if concerns begin to ease”, says Andersson. Historically, geopolitical crises have rarely had lasting effects on equity markets once uncertainty begins to subside.
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