Conflict and markets: what the experts think
● Oil in check
The oil price has surged this year on the back of geopolitical risks and Opec+ supply cuts. Yet the response to the Iranian attack on Israel has been muted, said Bloomberg. Rather than overshooting the $100/barrel mark, as some predicted, the price of Brent crude “edged lower” – falling below $90/barrel on Tuesday. Given escalating tensions, why is the market so relaxed? Partly because other factors are in play, said Lex in the FT. The oil price rarely continues rising “when the S&P 500 has a sustained decline”, and stock markets are already more jittery due to dimming hopes of US interest rate cuts. Moreover, as research company Rystad Energy notes, Opec+ producers can tap almost six million barrels of spare capacity a day if needed. Traders may also be betting that Iran and its largest customer, China, “will want to keep its exports flowing”. Oil prices “could well rise if further hostilities ensue”. But there are plenty of factors keeping them in check.
● “Pre-war” preps
Defence Secretary Grant Shapps has called for more military spending as the world enters a “pre-war” era. Chilling stuff – but music to the ears of defence contractors such as Babcock, said Matt Oliver in The Sunday Telegraph. The company, which is building the Royal Navy’s first Type 31 warship at Rosyth in Scotland, also helps maintain the country’s fleet of nuclear subs. A few years ago, Babcock was issuing “multiple profit warnings” and coming under “sustained attack from short-sellers”. All change. Since 2020, “shares have more than doubled”.
● Arms race
It’s the same story across Europe, said Katie Martin in the FT. Goldman Sach’s basket of European defence stocks has “pushed 40% higher just this year”. Meanwhile, investment manager VanEck reports that its European defence ETF has pulled in $500m since launching in 2023. The UK’s BAE Systems has gained 15% this year, comfortably beating the FTSE 100 index; German ammo-maker Rheinmetall is up by a “staggering” 83%. Goldman analysts warn that after such “a strong run of outperformance”, the sector now has “a challenging valuation period”. But, longer term, it’s hard to make the case for a decline. “In this geopolitical environment”, makers of “bullets, bombs and tanks” really count for something.