The ongoing Middle East conflict continues to cast a shadow over global markets, with investors closely monitoring the potential for a significant oil shock. Brent crude prices have surged by nearly 50 per cent since late February following a de facto halt in shipping traffic through the Strait of Hormuz. While a two-week ceasefire agreement offers some reprieve, the failure of US-Iran negotiations to secure a peace deal maintains the risk of escalation. Should the closure of the Strait, a crucial artery for nearly a fifth of global oil supply, persist, it could trigger the largest oil supply shock in modern history. This uncertainty has already led financial markets to reprice the risk of higher energy prices feeding into inflation.
Andrew McAuley, Head of Investments at UBS Global Wealth Management Australia, anticipates the conflict will calm in coming weeks, suggesting bonds and equities could rise despite recent recoveries. Historically, geopolitical shocks have often presented buying opportunities, with S&P500 sell-offs averaging 16 days. However, UBS acknowledges the risk of a deeper economic shock if the Strait of Hormuz remains shut past April, potentially driving oil prices beyond US$120 per barrel for months. Such a scenario would lead to higher headline inflation, particularly in Australia and the US, before impacting economic growth. UBS, a global financial services firm providing wealth management, investment banking, and asset management services, has revised Australia’s real GDP growth forecast to 1.9 per cent year-on-year, citing higher prices and lower volumes, and expects Australian headline inflation to peak at 5.5 per cent mid-year.
To navigate this volatile landscape, investors are advised to have a clear plan. Key strategies include maintaining adequate liquidity to avoid forced selling and capitalise on market dislocations. Effective diversification, leveraging attractively priced opportunities in government bonds and gold, is also crucial. Adding hedges can mitigate drawdowns while preserving exposure to potential rebounds. If the crisis appears set to persist, McAuley suggests reducing exposure to growth-sensitive sectors like technology in favour of more defensive segments. Ultimately, a diversified portfolio and maintaining composure during downturns remain the optimal long-term approach, though short-term risk mitigation is paramount.
