Your browser does not support JavaScript! Pls enable JavaScript and try again.

Asset Allocation | Economy

Markets Falter, but Take Lessons of History

Posted on
  • US/Iran tensions took a major turn toward escalation recently before de-escalating towards the end of the last week. An intermittent escalation has been clear since the US resumed oil sanctions on Iran in mid-2018 following its pullout from the “comprehensive plan” that restricted Iran’s nuclear development. In the past week, markets have been left wondering on a wider range of possibilities for the conflict between the US, Iran and regional proxies.

 

  • Citi analysts are at pains to discuss investment impact in the same breath as the devastating impact on lives in the region and beyond. However, to a significant extent, Citi analysts believe investors need to separate this security concern and tragic impact from global economic developments.

 

  • As a recent example, the September 14, 2019 attack on Saudi Arabia’s key oil infrastructure halved the region oil output. Crude oil immediately surged 15% and global equities fell sharply, but the impact on oil markets was erased in 11 days and 26 days in global equity markets. Looking further back to history, there were many concerns about world economic growth from 2003-2007 on the US invasion and occupation of Iraq. The war has had long lasting and wide, complex consequences, but driving recession was not one of them.

 

 

  • Recent escalations had broken an unusually strong upward momentum in financial markets which rallied sharply on the first day of the new year. This context is important for investors, but one needs to note that 18 of 20 geopolitical or political shocks Citi analysts identify since World War II had no lasting, independent consequence for financial markets. Although uncertainties between US and Iran may continue for a while, Citi analysts see no appetite for major escalation for the Trump administration as US election approaches.

 

  • What if the current conflict is not akin to one of those 18? For that, Citi analysts diversify across both low- and higher-risk investments in our asset allocation and tactically overweight gold as a direct risk hedge at present.

Related Articles