Dear Investors,
Standard Chartered – (12 Middle East Insights) All eyes on the Middle East
“The tragic incidents in Israel and Gaza have cast light on a key geopolitical risk.”
Market reaction
“The market reaction suggests investors do not expect an escalation in the conflict ensnaring the broader region and disrupting oil supplies.”
“The reasoning behind this relatively benign outcome: major stakeholders in the Middle East (except for Israel) do not have an incentive to see a broader conflict engulfing the region.”
“History suggests that Middle East conflicts that did not disrupt oil supplies had no lasting impact on oil prices (see chart above) or global financial markets over the medium term.”
Bonds as a hedge
“The latest geopolitical development increases our conviction on Developed Market government bonds.”
“As the pullback in bond yields this week showed, high quality bonds offer amongst the most attractive hedges against any escalation in the geopolitical conflict.”
“Job markets tighten (US job creation in September was much stronger than expected).”
“Still-elevated core inflation and the risk of higher oil prices could deter the Fed and other major central banks from cutting rates any time soon.”
“Bond yields close to their 16-year highs offer investors attractive returns over a 12-month or longer horizon.”
Energy sector
“US energy sector equities are highly correlated to the oil price.”
“In the current environment where oil prices face upside risks in an escalatory scenario, energy stocks can offer an attractive hedge.”
“Earnings expectations for the US energy sector have been stable in the past few months.”
“Since the start of July, consensus earnings growth expectations for 2023 have nudged up from -25.6% to -25.2%.”
“While growth expectations for 2024 have moved up from 0.3% to 2.5%.”
Edward Jones – (14 Driver Insights) Short-term risks vs. long-term opportunities
“The bear market in bonds is likely reaching its final stage as interest rates approach a cyclical peak.”
“But for a strong rally to materialize, Fed rate cuts will be required.”
Markets have a long history of overcoming geopolitical shocks
“Like many of the past geopolitical crises, the attacks in Israel triggered an initial flight-to-safety move in the markets, with government bonds, the U.S. dollar, and gold rallying.”
“Oil jumped more than 4% on fears that supply could be disrupted, but it gave back some of its gains in the subsequent days.”
“The situation remains fluid, and the potential of a prolonged war could destabilize the Middle East, but so far there has been no impact to global oil supply.”
“There are still questions about Iran’s involvement.”
“But unless the conflict spreads, it appears that the supply-and-demand dynamics for oil won’t change materially.”
Rates remain in the driver’s seat
“Despite geopolitical uncertainty taking center stage, the market’s focus remains squarely on rates.”
“Over the past two months, stocks have largely taken their cues from the bond market.”
“As the rally in long-term yields to new cycle highs threatens valuations and the economy’s positive momentum.”
Upside vs. downside in bonds appears favorable
“As economic growth slows, inflation gets closer to target in 2024, and as the Fed ends its tightening campaign…”
“…we see an emerging opportunity to complement CDs and short-term bonds with longer-duration fixed income.”
“In our view, the bear market in bonds is likely reaching its final stage as interest rates approach a cyclical peak.”
“But for a strong rally to materialize, Fed rate cuts will be required, which is likely a mid-2024 event.”
An unusual first year off of an equity bear-market low
“As a market-cap-weighted index, the S&P 500 is heavily influenced by the 10 largest companies, which have enjoyed outsized returns.”
“The so-called “magnificent seven” (Amazon, Apple, Alphabet, Meta, Microsoft, NVIDIA and Tesla) are up 77% over the past 12 months.”
“Since 1980, every single end to a bear market and start of a new bull has been accompanied by a broad rally in stocks”
“With the “average” stock, as proxied by the Equal Weight Index, outperforming the S&P 500.”
“And small-cap stocks, which are more sensitive to the business cycle, have handily outperformed their large-cap peers in the past, which is not the case this time.”
“Corporate profits are recovering after last year’s drop.”
“Inflation is now comfortably below the Fed’s policy rate and will likely continue to moderate, and rates are peaking.”