Iran Conflict and market implications
Current Situation
The United States and Israel are currently undertaking significant military operations against Iran. These operations have involved naval and air force strikes using missiles, bombs, and drones. Early actions focused on neutralising Iran’s air force and air defence systems, allowing the US and its allies to establish air superiority.
Iran has responded with missile and drone strikes targeting Israel and US military bases across the Middle East. The conflict has since widened, with Iran striking military and civilian infrastructure in several Gulf states, including Bahrain, Kuwait, and the United Arab Emirates. Some facilities affected include airports and LNG export infrastructure, and Saudi Arabia has also experienced disruption.
The conflict has resulted in both military and civilian casualties.
A key development for global markets has been the suspension of oil shipments through the Strait of Hormuz, a critical route for global energy supplies.
Market and Economic Impact
The economic impact is primarily being driven by two factors:
Disruption to global oil supply, particularly through the Strait of Hormuz
Operational disruptions to major Middle Eastern airline hubs, including Dubai and Doha
Brent crude oil is currently trading around US$100 per barrel. Market reaction was initially relatively muted given the scale of the conflict, but recent escalation has pushed prices higher. The key determinant for oil prices from here will likely be how long the conflict continues.
If elevated oil prices persist, they could contribute to higher global inflation, which may in turn place upward pressure on interest rates. So far, we have seen modest increases in interest rates both domestically and internationally linked to the conflict.
As typically occurs during periods of geopolitical uncertainty, the US dollar has strengthened, reflecting its status as a global reserve and safe-haven currency. The New Zealand dollar has weakened against the US dollar, and also against the Australian dollar. This currency movement has provided some support to portfolio returns.
Portfolio Positioning
From a portfolio perspective, it is important to note that the portfolios are well diversified across asset classes. Periods of geopolitical tension often result in short-term volatility in financial markets, which can lead to fluctuations in asset valuations.
However, the portfolios have been constructed with the expectation that market shocks and periods of instability will occur from time to time. A strong emphasis on risk management and diversification helps manage these events.
Importantly, the portfolios are not fully exposed to equities, which helps reduce the impact of market volatility during events such as this.
Summary
Caliber Investment continues to monitor the conflict and its impact on financial markets closely.
The portfolios remain well positioned to navigate this environment.
As geopolitical shocks are considered in the research and portfolio construction process, no significant portfolio changes are required at this stage.
For now, it remains business as usual from a portfolio management perspective.