CONTRIBUTORS
Stephen Dover, CFA
Chief Market Strategist,
Head of Franklin Templeton Institute
Kim Catechis
Investment Strategist,
Franklin Templeton Institute
Larry Hatheway
Global Investment Strategist
Franklin Templeton Institute
Originally published in Stephen Dover’s LinkedIn Newsletter, Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.
Yesterday’s Israeli military attack on Iran highlights the gap between hopeful diplomacy and reality. Militarily, the result will likely hamper Tehran’s nuclear and missile capabilities.
In capital markets, we see the following impacts.
Potential disruption of global oil supply: Due to Iran’s position as a moderate-sized oil producer and exporter, oil prices jumped on the news of Israeli’s military actions. Crude oil prices jumped US$4–US$5 per barrel, an increase of some 4%–6%. The concern is that an escalation of the military conflict could disrupt more significant supplies of crude oil and natural gas from larger producers in the Persian Gulf region. That said, there are no official confirmations that Iran’s oil production or export facilities have been targeted in Israel’s military strikes.
Move toward potential safe havens. Conflicts in the Middle East raise risk premiums, which is a further reason why global equity markets have dipped. But as long as the conflict does not escalate significantly further, we believe risk premiums and oil prices should return to lower levels. And even if Iran’s crude oil production or exports are disrupted, their relatively small share in global production will likely minimize the impact on global energy prices. Iran produces around 3.8 million barrels per day (bpd), around 4% of global production, and exports 1.8 million bpd, consuming the remainder domestically.1
The impacts of modestly higher oil prices are likely to be small for global growth, inflation and earnings. The world economy remains supported by monetary and fiscal easing (above all in Germany and China, but also in the United States), from the presence of low levels of US unemployment and solid US household balance sheets, and from receding underlying rates of inflation (potential tariff effects notwithstanding). In our opinion, a modest-sized “oil shock” will likely not risk the global expansion, nor change the inflation calculus significantly.
The risk case: Blocking the Straits of Hormuz would cut off Iranian oil exports to China. China is Iran’s biggest oil customer. Moreover, any efforts to hinder the flow of oil through the Straits would impact suppliers such as Saudi Arabia and the other Gulf states, as well as oil importers, particularly in Asia.
But many parts of the world are less susceptible to “oil shocks.” The United States is a net exporter of oil and gas (liquefied natural gas), and Europe is electrifying at pace, with half its electricity coming from wind and solar power. Additionally, Beijing has been pushing electrification urgently for national energy security reasons.
Conclusions. In summary, we believe a resilient world economy can withstand a moderately higher oil price. Accordingly, we find limited justification for altering our basic investment outlook, which calls for a broadening of equity market returns by region and sector, stable interest rates and modest further US dollar depreciation.
We would like to acknowledge the loss of life and the tragedy that accompanies military conflict. The human cost of such actions is immeasurable, and we hope for an expedient peaceful resolution.
Endnote
- Source: Statistical Review of World Energy, 2023.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
Commodity-related investments are subject to additional risks such as commodity index volatility, investor speculation, interest rates, weather, tax and regulatory developments.
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