US-Iran tensions not likely to stall equities markets as recession fears ease in 2020, strategists say
- Little to no chance of a recession in 2020; modest returns are likely for equity markets
- Oil prices would need to spike for a long period to cut into GDP forecasts, according to BNP Paribas Wealth Management
Investors should avoid the noise from a flare-up in tensions in the Middle East between the United States and Iran, as geopolitical risks, ranging from the US-China trade war to the US presidential election, are not likely to derail the equities markets, investment strategists, portfolio managers and economists said.
There is little to no chance of a recession in 2020 and equity markets are likely to continue their positive momentum this year, particularly in the US, strategists said. Returns will be more modest than 2019, but high-single digit returns are likely, according to Prashant Bhayani, chief investment officer for Asia at BNP Paribas Wealth Management.
“In terms of economics, oil is a key transmission mechanism,” Bhayani said. “Only if oil goes up US$20, US$30, US$40 a barrel and stays there for a long period of time would it have an impact on our forecast for [gross domestic product] and inflation. Every US$10 move in oil is about 0.2 to 0.4 per cent of global GDP, so there is a cushion.”
US President Donald Trump ordered a drone strike last week that killed top Iranian general Qassem Soleimani at Baghdad’s airport, inflaming tensions in the region. The Trump administration has said Soleimani was planning an “imminent” attack against American interests, but has provided few details about those threats.
Iran fired more than a dozen ballistic missiles at two military bases in Iraq that house American troops, but no one was injured or killed and analysts believe the attacks were planned to avoid casualties. Iranian Foreign Minister Mohammad Javad Zarif tweeted on Wednesday that Iran “took and concluded proportionate measures in self-defence” after the missile attacks.
Tensions appeared to have eased on Thursday after Trump stepped back from further military action against Iran in a televised address and said the US is “ready to embrace peace with all who seek it”.
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Charles Hamieh, senior portfolio manager at Rare Infrastructure, an affiliate of Legg Mason Global Asset Management, said it could “potentially be an interesting opportunity” to add more risk assets, such as equities, if markets were to sell off aggressively if tensions flare up again.
“I think the oil price has to be well above US$100 before you get any meaningful impact on economic growth,” Hamieh said. “The response from Iran, while not good, was somewhat restrained. I think the response from [US President] Donald Trump will be the same. I don’t think either party wants to engage in prolonged, meaningful escalation.”
WTI crude prices spiked above US$63 a barrel earlier this week, but fell to US$59.72 on Thursday.
Will Leung Chun-fai, head of investment strategy at Standard Chartered Wealth Management, said investors may be concerned rising oil prices could “have a negative impact on economic growth, leading to inflationary pressure”.
“During the Saudi attacks, we saw oil prices rally to above US$60 [a barrel], but it quickly receded to lower levels. We’ll have to wait and see if it’s the same this time, but we do not expect oil prices to stay above US$60 a barrel in the long term,” Leung said.
In September, two oil production facilities owned by Saudi Aramco, the state-controlled oil giant, were attacked by drones and missiles, briefly sending oil prices higher. The facilities were repaired and operational within a month’s time.
Stocks Blog: markets rebound on easing US-Iran tensions
Chinese oil and gas producer CNOOC saw its shares briefly spike 1.2 per cent in Hong Kong on Wednesday after the attacks, but gave back those gains over the course of the day. Its shares rose 0.29 per cent to HK$13.68 on Thursday. Oil giant PetroChina declined about 1 per cent, while Sinopec rose 0.63 per cent.
Mark Haefele, UBS’ global chief investment officer, said it was in neither side’s interest to escalate to a higher level and the effect on economies and earnings, barring a broader military conflict, should be “minor”.
“We think it’s noteworthy that Iran’s response was to target a US military base, and not target sites that would have directly impacted the supply of oil,” Haefele said in a research report.
John Greenwood, chief economist at Invesco, said a spike in oil prices would not be enough to affect the business cycle outlook, which is driven by the growth of money and the state of balance sheets, “both of which are in pretty good shape”.
“All the other stuff is waves on the surface – impeachment, trade wars, trouble in the Middle East, movement in the price of oil,” Greenwood said. “Politicians worry about [the price of oil]. It’s a serious concern for a lot of people. I don’t underestimate that. As far as the business cycle is concerned, as far as the trend in asset prices is concerned, it is simply a side issue.”
Heng Koon How, head of markets strategy at United Overseas Bank, said safe haven assets, including gold and long-term government bonds, are likely to rise as investors look to hedge, especially since the year began with heightened US-Iran tensions.
Standard Chartered Wealth Management said it expects gold to rise above US$1,600 an ounce this year. Gold spiked on Wednesday to US$1,598.89, but retreated to US$1,545.95 on Thursday afternoon as tensions eased.
