Tatton Investment Update: Middle-East conflict 

The US-Israeli strikes over the weekend on Iranian military targets represent a marked escalation in the middle-eastern conflict that has been effectively ongoing since October 2023.

The “ripple effects” of this conflict have already spilled over into Lebanon with Israel responding to rocket attacks from Hezbollah. But, like the rocket attacks from Iran on the wider region, these are predicted to last for some days, only.

Iran still represents a threat to the flow of commercial shipping through the Strait of Hormuz and a threat to the important oil and gas ports of Saudi Arabia and the UAE. Near-term prices have risen sharply and this could eventually put pressure on long term energy prices. However, it is too early to predict what will happen.

From an investment perspective, geopolitical upheaval of this nature creates a short term market shock because of the sudden increase in uncertainty, and markets have reacted in the way most would have expected.

• Spot Brent crude is trading at $80 per barrel, up from around $70-72 in Friday’s day trading and well above January’s $65 average: Natural gas prices are also higher.
• Gold is above $5,400: Other metals are a little higher.
• The US Dollar is about 0.5% higher against major currencies and 1% higher versus emerging market currencies.
• US and European equity futures are about 1% lower while Japan and China are down more than 2%. The Turkish market is down over 5%.
• US 10-year treasury yields have actually risen slightly but remain below 4% after last week’s global government bond rally. Japan bond markets have seen slight yield falls, Europe and UK yields are also likely to open lower.

Oil prices will matter but investors will especially watch the futures contracts beyond six months for signals on whether there could be a wider impact on global growth and inflation.

Iran does have allies in Russia and China. While Russia’s influence is severely constrained by its war in Ukraine, the important question regards China’s attitude and involvement. Can the US convince China that this conflict is not part of a strategy to further constrain its ambitions?

Officials from Russia and China have condemned the US led strikes but stopped short of pledging military or civilian support to Tehran. Strategically it is in China’s interest to engage with the West following Trump’s weakening of old alliances, and not antagonise the West and the US by supporting Iran with anything more than rhetoric.

Equity markets are better positioned for a higher risk environment than a month ago, with cheaper valuations and less optimism. As such, at least we start the week with the sense that while there is obvious downside, many will look for buying opportunities should they arise.

Markets do not like uncertainty and it is natural to be concerned about the impacts of geopolitical turmoil on investments. In some ways markets have become a little desensitised to geopolitical turmoil through the routine upheaval of Trump’s Presidency. The pessimistic explanation of this is that people have stopped trying to predict the outcomes of complex and fast-moving situations, becoming more used to shocks and discounting the chances of after-effects. The more optimistic explanation is that the political world has become better at containing situations.

Engineering a path to a new and stable Iranian political leadership will be neither easy nor quick. Investors will spend this week forming a view on how and when it ends.

We are monitoring the situation very closely, of course, and will provide further updates as the pattern of the conflict develops.

Thank you,

Lothar Mentel,

CEO and Chief Investment Officer, Tatton Investment Management.

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