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The most important geopolitical variable for the stock market
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Private Banking
This article has been prepared by ABG Private Banking, a division within ABG Sundal Collier. ABG Sundal Collier is the marketing name referring to all or any of ABG Sundal Collier ASA, ABG Sundal Collier AB or ABG Sundal Collier Limited and any of their affiliated or associated companies and their directors, officers, representatives and employees.
The conflict between the United States, Israel, and Iran has increased geopolitical tension, but the market reaction has so far been relatively limited. ABG Private Banking’s macro strategist Hans Peterson highlights the oil price as the single most important variable for the markets. As long as the energy market remains stable, there are good conditions for stock markets to withstand the increased uncertainty.
Market developments in relation to the conflict with Iran will primarily be determined by one factor: how long it lasts. The time dimension itself remains uncertain and continues to weigh on market sentiment. At the same time, several factors suggest that the conflict will not be prolonged. The United States is heading into a midterm election in November, and President Trump currently has weak approval ratings. Iran, meanwhile, depends on its oil revenues, meaning that a prolonged disruption in exports would severely impact its economy. For Israel, the situation ultimately revolves around ensuring that Iran is sufficiently weakened to allow a return to a more normal security environment.
The U.S. election cycle implies that public opinion pressure would reasonably need to ease as early as May for Republicans to have time to reverse the trend ahead of the autumn election. In practice, this would give Israel a few weeks to conclude the military phase, while Iran could return to more normal oil export levels. This timeframe – around five to six weeks – is likely what the market is currently factoring in.
For financial markets, however, the decisive variable is the oil price. Recently, stock market movements have largely tracked developments in the energy market, a pattern that is likely to persist as long as the conflict continues. At the same time, the impact of oil prices on the global economy is significantly smaller than in previous decades. Market estimates suggest that an oil price around $120 per barrel is still manageable for the global economy. Only if prices were to settle in the range of $150–200 for an extended period would the risk of a global recession increase.
At the corporate level, several international surveys also show that few companies currently view existing oil price levels as a decisive problem for their operations. Despite the seriousness of the conflict itself, the market reaction has therefore been relatively limited. One important explanation is that the impact is mainly concentrated in the energy market. Iran has long been economically isolated, meaning that most international companies have limited direct exposure to the country.
At the same time, market expectations for U.S. interest rate cuts have been adjusted. Expectations have shifted toward fewer – or in some cases no – cuts during the year, partly because higher oil prices create uncertainty around inflation. Despite this, the broader macroeconomic picture remains relatively stable. Earnings forecasts are in good shape in several regions, and economic indicators such as Purchasing Managers’ Index (PMI) point to continued expansion in the industrial sector. Industrial production in the U.S. also continues to show strength.
This means that the global economy is entering this period of geopolitical uncertainty from a relatively strong starting point. Historically, such disruptions tend to have a significantly smaller impact on markets when economic conditions are stable and central banks are not tightening policy.
ABG Private Banking’s assessment is therefore that markets can handle the current situation. However, volatility is likely to remain high as long as news flow around the conflict is intense and oil prices continue to react to each new signal.
The clear risk scenario would be if oil prices were to settle in the range of $150–200 per barrel for an extended period – an outcome that currently appears to be an extreme scenario. At the same time, investors have in recent weeks built relatively large hedging positions in the derivatives market, while sentiment in U.S. investor surveys is clearly negative. Once the conflict begins to subside, there are therefore conditions for risk appetite to return relatively quickly.
In a more uncertain market environment, ABG Private Banking has implemented tactical portfolio adjustments and continue to see opportunities in selected parts of the market.
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