Middle East War Escalates: Should You Reallocate Risks? 

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The retraction of global markets on Friday and this morning in Asia and Europe are rational risk-rebalancing moves, considering that the heartbreaking events in the Middle East present the potential to destabilize various essential parts of the global supply chain. 

The primary concern at present is the looming threat of a significant surge in oil prices , a scenario that could be triggered by the escalating tension in the Strait of Hormuz. This waterway, a vital artery for the global supply chain, is also bordered by Oman, where tensions are likewise mounting. This situation is compelling investors to stock up on oil supplies, in anticipation of a potential closure of this crucial corridor.

In this sense, the current scenario imposes a greater threat to global energy supply chains than the ongoing Israel-Hamas conflict, which does not directly impact any vital oil pipelines. 

From a stock market perspective, the risks impending from this scenario are further boosted by the resilience of inflation in the US, as seen in the latest CPI report. 

A significant escalation in oil prices could potentially prolong the current interest rate cycle of the US central bank, which could have far-reaching implications from a macroeconomic standpoint.

However, even more significant is the discussion about a broader movement in the world’s geopolitical landscape that has the power to transform global trade as we have grown accustomed to seeing.

After decades of increasing proximity between the world’s economies, recent movements like China’s post-COVID economic matrix shift, Russia’s seizure of Western trade, and Latin America’s nearshoring boom indicate that the world may be taking significant steps towards a more deglobalized perspective. 

Not coincidentally, JP Morgan’s CEO Jamie Dimon warned investors in his annual letter about the potential risks of such movements for the global economy’s long-term outlook. 

“Recent events may very well be creating risks that could eclipse anything since World War II – we should not take them lightly,” said the CEO. 

While the current perspective is, in strictly economic terms, inflationary in itself, it has also prompted central banks globally to reconsider the quality of the underlying assets supporting their balance sheets. For instance, China has been trading US treasuries for gold at one of the fastest paces in history, helping real rates stay at significantly high levels. 

Faced with all these risks, investors rationally tend to reallocate some investments into assets historically treated as lower risk—these being gold , other commodities of finite supply (like oil itself), the US dollar , and the Japanese yen —as well as real estate. 

In recent years, Bitcoin has also emerged as an alternative. However, cryptocurrencies have still proven to be very sensitive to interest rate cycles, which may hinder this proposition.

Within the stock market, the defense sector is likely to gain interest due to the probable increase in military spending by various countries.

While the human situation is heartbreaking and demands swift and immediate action toward peace, investors must stay calm when thinking strictly from an investment perspective. 

In this sense, the aforementioned factors speak more of a risk-rebalancing approach to investing than of an urgent need for a complete change in portfolio composition or a deeper risk-off move. 

As Dimon wisely pointed out in his annual letter, “When terrible events happen, we tend to overestimate the effect they will have on the global economy.” 

While the long-term investment proposition remains unchanged, it is prudent to continuously monitor and address macroeconomic risks within one’s portfolio, ensuring a sound and forward-looking approach to investment strategy.

Our hearts and prayers go to our friends and colleagues in Israel. May this situation change promptly, and may good times return swiftly, bringing peace and stability to the region. 

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Disclaimer: The views expressed in this article do not necessarily reflect the views or opinions of the company.

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