Defence stocks could lift.
“The US has just used for the first time one-way effective suicide drones, that’s a piece of kit they hadn’t used before.”
On the domestic market, he said there was not likely to be much impact on individual stocks on the NZ market. “It’s more that you might see a pullback in general on the NZX50.”
Dean Anderson, founder of Kernel, said the key question for markets was what happened next. “We are in the very early stages of this conflict and as is often the case, speculation and incomplete information are driving much of the narrative. Not surprisingly, investors should expect heightened volatility as global markets work through the noise and assess the direction of travel. I expect we will see gold jump.”
Rupert Carlyon, founder of Koura, said he was concerned markets would react “strongly”.
“It also doesn’t help that markets are already fearful and volatile. Investors have been nervous for the past three-six months due to AI, interest rates and inflation – now they have something real and tangible, they may react strongly.”
Fuel prices
Olsen said another consideration was fuel prices.
“There’s a pretty strong view that oil prices will spike and show a bit more volatility – although we’ve said that every time there’s been conflict, and it didn’t really happen last time.”
But he said this time could be different for a few reasons. “You’ve seen the head of Iran killed alongside a number of other political and military leaders. It’s very unclear what further retaliation by Iran might look like. Might they strike oil-based facilities? Quite possibly. No one knows what the rule book is now.
“You’ve seen parts of Bahrain, Kuwait struck as well. Normally, those actors are not part of it, they haven’t been in the past … those quite well-off countries that are often talking about stability, they’ve driven a lot of their economies through oil and general energy funds. They’re not as safe as they might have originally thought. The fear factor will be running rampant a bit more in the markets heading through tomorrow.”
Insurance rates for travel through the Strait of Hormuz were elevated. “No one really wants to go through and risk their cargo ship or oil tanker being blown up. Given that 20% of the world’s energy goes through there, there’s definitely a risk at that point.”
Olsen said some market traders were predicting oil prices could hit US$100 ($167) a barrel.
“The two big unknowns at the moment are that one, this isn’t done. The US has made it clear in comments from the US president that this is a week-long bombing mission that will continue.
“With the Iranian supreme leader dead and no clear understanding of command and control in Iran, who’s calling the shots and what they might be wanting to do, everyone’s quite unsure of whether there is further escalation and retaliation.”
Mike Taylor, founder of Pie Funds, said oil prices were his main concern.
“The new conflict raises three potential transmission channels: Energy supply disruption, shipping and insurance risk in the Gulf and Strait of Hormuz, and a broader risk-off sentiment through oil and inflation expectations.”
He said historically markets would either behave as they did in the 2003 Iraq conflict – when prices spiked briefly but supply and shipping continued, and markets recovered quickly – or the 1990 Gulf crisis when oil prices rose persistently and shipping was disrupted. That created more market disruption.
“At present we are too early to know which template will dominate.”
He said he would also be watching credit spread behaviour and whether there was any further escalation in the conflict.
What about inflation?
Olsen pointed to the recent Reserve Bank statement which noted geopolitical risk as a factor in tradeable inflation.
“You’ve already got inflation outside the target band. Expectations were that inflationary pressures would continue to soften. If you see a spike and generally higher pressure on oil prices continuing because of this ongoing conflict, that not only raises the cost to households to drive around but it means the cost of transporting everything becomes more expensive which could put further pressure on foods. We’re just a little cautious on the inflationary risk that there might be if oil prices did spike and hold higher. At the moment all of this is a huge if.”
Anderson said the Strait of Hormuz is a critical route, particularly for India and China. “Any meaningful disruption to supply could send oil prices higher and in turn more inflation. That said, there are contingency mechanisms and alternative supply responses that could help cushion the impact. Their effectiveness all depends on the duration and scale of the conflict.”
What should investors do?
Olsen said day traders might see an impact on their investments but other people would need to take a longer view.
People should generally be invested in a fund that fits their risk profile, so if they need their money soon, they should not be in a fund that moves a huge amount with market movements.
“Put it this way, I won’t be looking at my KiwiSaver this week,” Olsen said.
Anderson said it was too early to be drawing conclusions. “It’s best to remain informed and for investors to avoid making decisions based on early speculation and noise. Regardless of the political outcome, even a contained conflict is likely to mean an extended period of strain for the region and its people.”
Carlyon said there were reasons for KiwiSaver investors to be excited. “A market downturn makes a great buying opportunity.”