The news is currently dominated by the conflict in Iran and the subsequent impact on energy prices. The consequence is best shown at your local petrol station.

The graph below shows the price of oil over the past 5 years:

Undoubtedly, the price spike in recent weeks is dramatic and has led to high fuel prices. As an aside, I don’t seem to recall paying over $3 per litre in Feb 22 when the price of oil was actually higher than it is now… Never Waste a Good Crisis!

We see three possible outcomes moving forward:

Scenario 1: A quick resolution to the current tensions, seeing trade return to normal levels.
Scenario 2: Tensions extend for the next couple of months, seeing material disruptions as a function of the Strait of Hormuz being closed.
Scenario 3: Expansion of the conflict into a regional war that would also see the potential closure of the Red Sea.

Should scenario 2 or 3 eventuate, the biggest consequence will be high inflation, leading to raising interest rates, which in turn will cause economic contraction; think company profit pressure, job losses, falling asset prices.

We tend to have the view that sanity will prevail and Scenario 1 will be the outcome, likely by the middle to end of April. However, we are making contingency plans to position our client portfolios more defensively should the alternative scenarios prevail.

However, at the present time we are content with how our client portfolios are weathering the storm and are not implementing any changes of an overly defensive nature. For some perspective, the below graph shows the impact of previous conflicts on the US Equity market:

The above is reassuring in that the conflicts have not traditionally had long-lasting impacts on sharemarkets.

Regards

Derek & Leesa

More perspectives on the Iranian conflict

We see three possible outcomes moving forward:

The above is reassuring in that the conflicts have not traditionally had long-lasting impacts on sharemarkets.

Perspectives on the Iranian conflict