(06 January 2020)DAILY MARKET BRIEF 2:Looking through the noise of US-Iran tensions
The Euro Stoxx 50 index was trading 1.2% lower in morning trade, Brent crude was 4.3% higher, safe haven bond prices were stronger and gold was
up by 1.3% as Iran threatened to retaliate.
Geopolitical events by their nature are unpredictable, but previous periods of increased tensions suggest that the impact on wider markets
tends to be short-lived, with more lasting effects confined to local markets and assets that are directly impacted by the tensions. In
general, this supports holding a diversified portfolio, while we also make the following specific recommendations:
Don’t expect a sustained oil price rally. If the situation worsened, and oil supplies were disrupted, this could have broader
economic and financial market impacts through a sharp rise in crude oil prices. However, spare capacity in oil remains adequate (OPEC's and
Russia's spare capacity is around 3.3mbpd). And, we still expect an oversupplied oil market in 2020 (0.3mbpd), particularly in 1H20, due to
non-OPEC supply growth (by the US and Norway) outpacing modest oil demand growth.
While oil prices are likely to build in a larger risk premium amid heightened US-Iranian tensions and potential retaliatory
measures by Iran, we think Brent prices will struggle to hold levels above USD 70/bbl in 1H20. This proved to be the case last September when a
Saudi refinery facility was attacked.
Gold remains a good hedge against political uncertainty. Political uncertainty could send safe-haven flows into gold, as
Friday’s price gains illustrate, and we see gold continuing to appreciate this year.
Muted US economic growth and lower real interest rates reduce the opportunity cost of holding gold. And, since gold is priced in US
dollars, a weaker dollar – which we expect in 2020 – supports higher gold prices.
Stay invested, but consider protection strategies. Individual geopolitical risks tend not to be sufficient to drive a
sustained downturn in markets, and it is important for investors to retain a long-term focus, in line with their broader financial plan.
Investors worried about deploying capital can, however, take advantage of relatively low volatility in the option market at present to
make use of strategies that reduce portfolio volatility or add explicit protection. They might increase their diversification via
dynamic or systematic allocation strategies, or through structured solutions such as notes that offer a degree of capital protection.
Read more here.
Navigating market uncertainty and risks is challenging, but considering these choices can help investors smooth the investment path for
this year.
By UBS
