Quick Bite – Using Scenario Analysis to assess Middle East War
There are bucket-loads of commentaries and expert opinions about what has occurred in the “12 Day War” between Israel and Iran, but far more noise and uncertainty about what it means from an investment point of view. Did the US bombing raids on the three Iranian nuclear facilities “obliterate” Iran’s path to nuclear weapons or will they speed up future development? Has the Iranian enriched uranium been secreted across a multitude of sites, perhaps to be deployed in a future “dirty bomb”? Will Iranian support for its regional proxies Hamas, Hezbollah and the Houthis disappear or ramp up? Will the Iranian regime collapse or gain support from a patriotic populace? We don’t know the answers to these questions.
Betting Odds of Iran Closing Strait of Hormuz (Polymarket)
Source: Yardeni Research
There are some things we do know. Both Israel and Iran appear prepared to accept President Trump’s fragile ceasefire deal at present. Iran did not attack the oil fields of its Gulf neighbours, and nor did it close the Strait of Hormuz. Neither Russia nor China came to Iran’s aid beyond diplomatic platitudes. The price of oil has given up on its “war premium” and share markets in the developed world are very close to their record highs. Israel suffered civilian losses and damage to infrastructure, but its military and intelligence capabilities emerged from this war with its reputation greatly enhanced. Indeed, Israel’s stockmarket hit a new record high over the past couple days, up 10% in the last 2 weeks.
How to cope with uncertain information from an investment perspective?
Scenario analysis is a valuable tool in making investment decisions because it helps investors understand the potential range of outcomes based on different assumptions. By examining various plausible scenarios – such as best-case, worst-case, and most likely conditions – investors can evaluate how specific variables might impact the investment’s performance. This process enables a more comprehensive assessment of risk and reward, highlighting possible vulnerabilities and opportunities. It also aids in stress-testing investment portfolios, ensuring they are resilient under adverse conditions.
Scenario analysis supports strategic planning by providing insights into how different factors can influence investment returns over time. This understanding allows investors to develop contingency plans, diversify effectively, and make informed decisions aligned with their risk tolerance and financial goals. Overall, scenario analysis enhances decision-making by transforming uncertain future events into manageable and quantifiable parameters, facilitating more robust and confident investment choices.
Three Scenarios for the “12 Day War”
Source: Wells Fargo
The above table (courtesy Wells Fargo) is not meant to be comprehensive, but rather provide an easy structure for analysing differing perspectives. At present, we tend towards the “Prolonged Ceasefire” scenario, which anticipates improved global growth prospects on the back of lower oil prices. In such a scenario, central banks will be more comfortable to cut interest rates in the absence of an energy shock and its inflationary impact. At the same time, safe havens such as the USD will be less attractive and will likely weaken. We retain our view that gold should continue to perform well as central banks diversify out of USD.
Source: Yardeni Research
While the oil price might not benefit from a supply disruption, improved global growth suggests that the price of a barrel may have bottomed and be ready to break out of the trend decline since peaking in late 2021 (as suggested by above chart).
Gold Price Last 10 Years
Source: Goldprice.org