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Three questions to navigate the current Middle East crisis

Three questions to navigate the current Middle East crisis

  • 02 November 2023
  • By OCBC Wealth Management
  • 10 mins read
  • The Israel-Gaza conflict has introduced short-term uncertainties and investors should position defensively and remain invested to avoid being out of the market when the recovery comes around.
  • We do not expect the current tensions to lead to a sustained rise in oil prices in the long term for now.

Geopolitical risks remain elevated: At the time of writing, tensions along the Israel-Gaza border are at risk of escalating further, while Russia-Ukraine as well as US-China tensions show no signs of abating.

So far, financial markets have not reacted as negatively to the Israel-Gaza conflict as expected, although there was still a flight-to-safety to safe-haven assets such as Gold and US Treasuries. As with previous Middle East crises, crude oil prices have also risen due to fears of a potential disruption in supply.

We address three questions that you may have regarding these uncertain market conditions.

  1. How should we position our portfolio now?

    We continue to advocate an overall defensive stance going into the end of 2023, given the uncertain global economic growth outlook and elevated geopolitical risks.

    While near-term risks remain high, the negative effects on financial markets, especially equities, do not last for very long (Figure 1) and investors should remain appropriately invested to avoid being out of the market when the recovery comes around.

    We currently prefer Japanese equities, the Healthcare, Consumer Staples, and Utilities sectors, as well as quality companies that pay consistent dividends. In fixed income, investors should hold more US Treasuries and Developed Markets Investment Grade bonds as they are more resilient in the event of a US recession while providing income to tide you through.

    Holding some gold within your investment portfolio is also a form of “portfolio insurance” if you expect a US recession.

    With geopolitical tensions remaining high, opportunistic investors can also consider investing in the aerospace and defence industries which will benefit from increased defence spending.

  2. Will the Israel-Gaza conflict spread?

    There are concerns that militia groups in Lebanon, Syria and even Iran could get involved in the conflict.

    The impact to investors will be mainly in crude oil prices and its contribution to global inflation. The more Middle Eastern countries get involved, the greater the risk to crude oil prices which can lead to higher inflation.

    Persistently high inflation will force the major central banks to keep raising interest rates, which will be negative for both equities and bonds. While we do not expect such a scenario at this time, we will continue to monitor the latest developments as they unfold.

  3. How have crude oil prices reacted in past crises?

    Firstly, neither Israel nor its direct neighbours are large oil producers. Thus, the current conflict has no direct impact on the supply of crude oil. Such geopolitical shocks to the oil market also do not tend to persist, with oil prices coming down six to twelve months afterwards (Figure 2).

    However, the oil market is beginning to price in a risk premium to account for the rising geopolitical risk in the region. Prior to the attack, markets had been expecting a normalisation of relations between Israel and Saudi Arabia and a resulting increase in Saudi oil output as a goodwill gesture.

    The attack on Israel has complicated this arrangement as Saudi Arabia is now under pressure to stand alongside its Palestinian allies. However, if Saudi Arabia proceeds with the Israel arrangement, it will be a positive boost for markets.

Bottom line:

  • The Israel-Gaza conflict has introduced short-term uncertainties and investors should position defensively and remain invested to avoid being out of the market when the recovery comes around.
  • Opportunistic investors can consider taking positions in the aerospace and defence industries as countries raise defence spending amid elevated geopolitical tensions.

Products you may consider:

Unit Trust

abrdn Global Dynamic Dividend FundNEW

  • The fund will invest in the abrdn SICAV I - Global Dynamic Dividend Fund. This underlying fund invests at least two-thirds of the fund’s assets in equities and equity-related securities of companies
  • The fund aims to provide income and capital appreciation by investing in the underlying fund. The underlying fund has a historical, annualised dividend of up to 6% p.a.^, as at end September 2023, according to Bloomberg data
  • A well-diversified portfolio including value and growth stocks, across various sectors and countries
  • Enjoy an 0% sales charge when you invest from now till 10 November 2023. Limited tranche only+

PIMCO Income Fund

  • Designed for investors who seek steady income with a historical annualised dividend yield of up to 6.53% p.a.#
  • The fund taps into global bond markets with an overall average investment grade credit rating of AA-
  • A consistent track record with resilience during periods of volatility

^Past performance and dividend yield figures are in reference to abrdn SICAV I - Global Dynamic Dividend Fund. Past performance figures do not reflect future performance.

#Bloomberg, as of end-September 2023. Past performance figures do not reflect future performance.

+The 0% sales charge tranche will close on 10 November 2023 or once subscription quota hits. Realisation charge amounting to 2% of the redemption proceeds applies if the fund is sold within 2 years from inception date.

OCBC RoboInvest

Stable US Consumer Giants

The Stable US Consumer Giants portfolio provides diversified exposure to selected stocks with relatively lower volatility in the Consumer Sector in the US. The Consumer sector provides relatively steady and predictable growth across business cycles and thus potential for steady capital appreciation.

Stable US Healthcare Giants

The Stable US Healthcare Giants portfolio provides diversified exposure to selected stocks with relatively lower volatility in the Healthcare Sector in the US. The Healthcare sector is likely to experience steady growth in demand for medical products and services due to rising economic affluence as well as an ageing population, which should provide potential for steady capital appreciation in the long-term.

Precious Metal

Gold is seen as a safe-haven asset and an inflation hedge in periods of market uncertainty. Diversify your portfolio with OCBC’s Precious Metals Account, which lets you buy as little as 0.01 ounces of gold for less than S$30. Investments are subject to investment risks, including possible loss of the principal amount invested. T&Cs apply.

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