Middle East Tensions Are Rising: Here’s What It May Mean For Your Portfolio

Middle East Tensions Are Rising: Here’s What It May Mean For Your Portfolio
Theodora Lee Joseph, CFA

about 1 month ago3 mins

The headlines out of the Middle East are increasingly a worry for investors, with a recent drone assault on US soldiers in Jordan and continuing attacks on ships in the Red Sea stoking new fears that the conflict could widen and create more instability. So it’s a good time to consider how these tensions could affect financial markets – and to make doubly sure your portfolio is built to expect the unexpected.

Here are three potential consequences to think about:

Possible hike in shipping costs. With all the troubles in the Red Sea, the cost of shipping by boat has shot up big-time. Cargo vessels bound for this vital channel now have to be rerouted the long way – around the southern tip of Africa and the Cape of Good Hope. And that’s jacked up the prices for transit and insurance. Shipping is now 350% more expensive from Asia to Europe, and 100% pricier from Asia to the US. If the disruptions continue, they could mess up the availability of ships, containers, and crews on routes worldwide. But you probably won’t have to worry about a return of those Covid-era price hikes on the everyday stuff you buy, according to Goldman Sachs. This time around, the shipping cost surges aren’t coinciding with factory shutdowns and wild demand spikes. See, those global-spanning transport costs are just a tiny bit of what you pay for goods (like 1.5% on average), and sea freight is even smaller (around 0.7%). So, even if you assume a doubling of the cost to move things by boat, it’d only push up the price of regular goods by about 0.4%, and overall inflation by just 0.1%.

Potential bump up in energy prices. The Middle East is the oil capital of the world, producing about 31.3% of the global supply. And if the current conflict escalates, it could potentially disrupt a big chunk of that supply, making the slippery stuff that the world runs on more expensive. Analysts at Fitch ratings believe that a 60% increase in oil prices this year could shave 0.4% off world economic growth. And that makes sense: higher oil prices tend to force companies and households to cut back on their spending. What’s more, higher oil prices could also add around two percentage points to the US’s expected inflation rates.

Higher demand for safe-haven assets. When things get shaky in the world, folks usually look for “safe bet” investments that are likely to hold their value – stuff like gold, US Treasuries, US dollars, Swiss francs, Japanese yen, and real estate. And in times of conflict, defense industry stocks – Lockheed Martin, Northrop Grumman, and Raytheon Technologies, to name a few – tend to do well, as governments look to spend more on security. But when nerves are on edge, it can be rough sledding for riskier investments like cryptocurrencies, emerging market stocks, and high-yield bonds – with fewer people eager to play the odds.

Bottom line: there are plenty of geopolitical risks out there, but they shouldn’t stop you from investing. Instead, they should remind you of the importance of having a diversified portfolio. So be sure you’re not going all-in on a single bet, and be sure you spread your investments across different countries, regions, industries, and asset classes. That’s your safety net against any turbulence that might come your way.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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