‘Middle East tensions unlikely to result in war’

Following the US drone strike that killed Iranian military leader, Qasem Soleimani, the FAA (Federal Aviation Administration in the US) has banned flights over Iraq, Iran and the Gulf of Oman after Iran launched a missile attack on US-led forces in Iraq. Subsequently, South Africans are continuing to question how rising tensions in the Middle East will adversely impact local markets.

While the US/Iran situation is undoubtedly causing much global uncertainty, all-out war seems unlikely, according to Izak Odendaal – Investment Strategist at Old Mutual Multi-Managers. He points out that there is little appetite in the US for invading another country in the Middle East while they’re still trying to extricate themselves from Iraq and Afganistan, and Iran is too small and isolated to take the US on directly.

“What is likely is a continuation and perhaps escalation of ‘incidents’ such as last year’s drone strike on the Saudi oil facilities, cyber-attacks, and other more indirect forms of conflict,” says Odendaal.

“The bigger question for investors is how the oil market will respond to the conflict. Unlike the energy crisis in 1979, Iran is unlikely to engineer the doubling of oil prices. Due to global sanctions on the country, Iran is a much smaller participant in global oil markets. But it could cause supply disruptions by jeopardising shipping in the Gulf, particularly at the chokepoint at Hormuz.”

Odendaal says that despite investment traders pushing up the price of Brent crude, the rand oil price is still pretty much in line with its average 2019 level and trading well within the $55 to $75 per barrel range of the past three years.

“We should take into consideration that the world as a whole is a lot less energy-intensive, and therefore a repeat of the 1970’s oil supply disruptions will not cause as much damage. Having said that, each global recession of the past few years was preceded by an oil price spike, so we need to keep an eye on this as the global economy is still quite fragile at the moment,” says Odendaal.

“The lack of global demand generally means that higher oil is unlikely to cause inflation and lead to higher interest rates. This is unlike the 1970s again, where the oil spikes caused stagnation and inflation (stagflation, as it became known).”

As global investors become more cautious, he says that the rand is usually one of the first currencies they sell and has resulted in its value weakening about 20cents against the dollar since the start of the year.

“While the combination of a weaker rand and higher oil price is never good news for South Africans, here too it is unlikely to result in sustained higher inflation,” concludes Odendaal. “Things can, of course, change quickly, but the overall market reaction is still relatively subdued.  Unless it escalates into a full-blown war, these sorts of geopolitical standoffs rarely have a deep and lasting impact on financial markets, and South African investors should be careful not to overreact.”