ClockWise: Geopolitical risk affecting commodities more than equities, for now

Despite substantial geopolitical risk and direct hostilities between Iran and Israel, stock markets have actually fared rather well in recent weeks.

The FTSE All World index is within 1% of the recent all-time highs and US stocks last week recorded their fourth consecutive weekly gain. A few wobbles are emerging though and, with volatility measures now rising, global equity markets feel more on the back foot.

So far, commodity markets have reacted most clearly to the worsening conflict in the Middle East as fears have risen around potential supply disruptions. Last week saw Brent oil post its strongest price increases since January 2023, rallying by 8% amid fears of a wider regional war and lingering risks to Iran’s oil supply.

At time of writing, Brent has risen to $80 a barrel for the first time since August. However, at times over the past two years, Brent has traded close to $100/bbl. Slower demand growth – predominantly reflecting trends in China – and increased supply will have helped contain oil prices, but China policy stimulus and geopolitical threats to supply could push in the other direction. We do not think that equities are immune from geopolitics, but it could take a significant oil price shock from here to threaten the kind of long-term economic impact that would really dent stock markets.

Chart 1: Oil Prices have risen but remain relatively low

Source: Bloomberg as at 4 October 2024.

While we are nervous around geopolitical tensions in the near term, we remain broadly positive on equities in the medium term based on improving global macro conditions. Our updated Investment Clock is in Reflation. However, with recent improvements in unemployment data and the shift towards easier policy from the Federal Reserve, it appears the Clock is ticking towards Recovery (Chart 2). The Recovery quadrant of the Clock would be consistent with a soft landing in the US economy and further strength in equity markets.

While geopolitical risk does pose a threat to equity markets in the near-term and reins in our confidence levels, we maintain an overall positive view on stocks. The economic backdrop and monetary policy loosening can continue to support markets and investor sentiment from here.

Chart 2: Our Investment Clock looks to be heading towards Recovery

Source: RLAM as at October 2024.

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