Market Summary
Israel/Palestine Conflict
We're going to start with the conflict in Israel and Palestine today, as many of you have asked about the impact of this on your superannuation and investments. Sadly, the tensions between these two groups has ramped up significantly over the last two weeks, and as of last count about 4,200 people have lost their lives.
Putting aside the tragic cost this has had on the families and communities of those who have passed away, today we'll assess the likely impact of this conflict on business and share prices.
To start, the market has largely shrugged off the economic impact of this conflict, with share markets unchanged since the escalation two weeks ago.
There may be impacts on the price of oil however. In fact, oil prices began to rise again in the aftermath of the Hamas attack due to fears of the involvement of other countries in the conflict.
Obviously, the Middle East is a very volatile region, and a very large producer of crude oil, so the fears of other countries becoming involved in the conflict are pushing prices up in anticipation.
As you can see in the table below, of the top 9 oil producing countries in the world, 5 are located in the Middle East so it is a very important region to fund the world's energy needs.
The rationale for this is simple, let's say Iran becomes involved in the conflict, which at this stage is a realistic scenario. War involves effort and resources, and every resource that goes into fighting a war is one less resource that can focus on producing oil, Iran's largest export.
This might result in a reduction in the amount of oil that Iran can produce, and due to supply and demand will push prices up.
So the price of oil has already started to increase in anticipation of this.
That being said, as you can see in the chart below, oil is a very volatile asset to begin with. Over the last 10 years it has endured some wild swings, and the price has already increased significantly over the last few months as you can see on the far right.
So there's a strong argument to say that the oil price reaction is just within the realm of ordinary volatility, and may not be affected in the long term by this conflict.
The below graph shows the nominal price of oil compared to the price of oil in the oil crisis of 1979. As you can see, the price of oil in real terms are still below the highs of 1979 and are in line with the mid-2000's.
How will this affect the share market?
Okay, so how are shares likely to react?
As I mentioned earlier, shares are largely unchanged over the last two weeks.
The notable exception to this is of course the Israel stock market, which is down 10% in the last two weeks, as measured by the Tel Aviv 125, their primary stock index.
That being said, Israeli shares make up such a small portion of global shares (0.4% to be precise) that it's not going to have a material affect on your portfolio.
Oil shocks in the Middle East are also relatively common. The below graph shows the price of oil after various geopolitical events and how long oil prices were raised.
So why are share prices unchanged? The simple reason is that stock markets are essentially just a bunch of businesses at the end of the day.
These businesses are valued on the profits they generate, and the conflict in Israel simply isn't going to affect the profits of Apple, Microsoft and Google (nor BHP, Commonwealth Bank and CSL in the Australian index) in any material way.
To illustrate this point, one of my favourite charts (there's a few) is the Wall of Worry.
As I've explained to many of you in the past, there is always something for investors to worry about. Whether that's wars, recessions, terrorist attacks, or even a few pandemics there's always going to be something going on in the world for investors to be concerned.
As you can see though, despite these many negative events occurring over the last 120 years, the Australian Share market has returned 11.70% p.a. since 1900 which is a fantastic result.
For those doing the maths, if you had invested $1 into the sharemarket back in 1900, and lived to the ripe old age of 123, you'd now have $813,842 for your efforts.
So the key take away here is that worries are normal around the economy and investments, and sometimes they become intense, and have a very real impact on markets, but they eventually pass and the stock market just keeps rising.
To use an analogy, negative economic news can be like stormy weather in the world of investments. Just as bad weather doesn't change the fact that you own a sturdy house, negative economic news doesn't change the value of a good long-term investment.
This is why I recommend focusing on what you can control, which are the factors below:
Please keep in mind this in General Advice only, for personal advice specific to you please get in touch over the phone or email.
Regards,
Chris Magnus
- In August 2021 the ASX 200 hit an all time high of 7,632, but has dropped over this time to a low of 6,407 in October. Over the last 12 months the ASX has traded within a limited range, and is now 6,985 today.
- Global shares have followed the same path, with the S&P 500 (the US Stock Index) hitting a peak of 4,818 before dropping down to 3,636 at the lows. It has then since recovered back to 4,314 today.
Israel/Palestine Conflict
We're going to start with the conflict in Israel and Palestine today, as many of you have asked about the impact of this on your superannuation and investments. Sadly, the tensions between these two groups has ramped up significantly over the last two weeks, and as of last count about 4,200 people have lost their lives.
Putting aside the tragic cost this has had on the families and communities of those who have passed away, today we'll assess the likely impact of this conflict on business and share prices.
To start, the market has largely shrugged off the economic impact of this conflict, with share markets unchanged since the escalation two weeks ago.
There may be impacts on the price of oil however. In fact, oil prices began to rise again in the aftermath of the Hamas attack due to fears of the involvement of other countries in the conflict.
Obviously, the Middle East is a very volatile region, and a very large producer of crude oil, so the fears of other countries becoming involved in the conflict are pushing prices up in anticipation.
As you can see in the table below, of the top 9 oil producing countries in the world, 5 are located in the Middle East so it is a very important region to fund the world's energy needs.
The rationale for this is simple, let's say Iran becomes involved in the conflict, which at this stage is a realistic scenario. War involves effort and resources, and every resource that goes into fighting a war is one less resource that can focus on producing oil, Iran's largest export.
This might result in a reduction in the amount of oil that Iran can produce, and due to supply and demand will push prices up.
So the price of oil has already started to increase in anticipation of this.
That being said, as you can see in the chart below, oil is a very volatile asset to begin with. Over the last 10 years it has endured some wild swings, and the price has already increased significantly over the last few months as you can see on the far right.
So there's a strong argument to say that the oil price reaction is just within the realm of ordinary volatility, and may not be affected in the long term by this conflict.
The below graph shows the nominal price of oil compared to the price of oil in the oil crisis of 1979. As you can see, the price of oil in real terms are still below the highs of 1979 and are in line with the mid-2000's.
How will this affect the share market?
Okay, so how are shares likely to react?
As I mentioned earlier, shares are largely unchanged over the last two weeks.
The notable exception to this is of course the Israel stock market, which is down 10% in the last two weeks, as measured by the Tel Aviv 125, their primary stock index.
That being said, Israeli shares make up such a small portion of global shares (0.4% to be precise) that it's not going to have a material affect on your portfolio.
Oil shocks in the Middle East are also relatively common. The below graph shows the price of oil after various geopolitical events and how long oil prices were raised.
So why are share prices unchanged? The simple reason is that stock markets are essentially just a bunch of businesses at the end of the day.
These businesses are valued on the profits they generate, and the conflict in Israel simply isn't going to affect the profits of Apple, Microsoft and Google (nor BHP, Commonwealth Bank and CSL in the Australian index) in any material way.
To illustrate this point, one of my favourite charts (there's a few) is the Wall of Worry.
As I've explained to many of you in the past, there is always something for investors to worry about. Whether that's wars, recessions, terrorist attacks, or even a few pandemics there's always going to be something going on in the world for investors to be concerned.
As you can see though, despite these many negative events occurring over the last 120 years, the Australian Share market has returned 11.70% p.a. since 1900 which is a fantastic result.
For those doing the maths, if you had invested $1 into the sharemarket back in 1900, and lived to the ripe old age of 123, you'd now have $813,842 for your efforts.
So the key take away here is that worries are normal around the economy and investments, and sometimes they become intense, and have a very real impact on markets, but they eventually pass and the stock market just keeps rising.
To use an analogy, negative economic news can be like stormy weather in the world of investments. Just as bad weather doesn't change the fact that you own a sturdy house, negative economic news doesn't change the value of a good long-term investment.
This is why I recommend focusing on what you can control, which are the factors below:
- Long-Term Perspective: When you're investing for the long term, you're focusing on the big picture. Economic conditions can go up and down, but history shows that economies tend to grow over time. Just like weather patterns change, economic conditions are not static.
- Diversification: They say diversification is the only 'free lunch' in investing. This means spreading your investments across different types of assets. By doing this, you reduce the impact of negative news on any single investment.
- Time Averages Out Fluctuations: The stock market, for example, can have daily or even yearly ups and downs. But over the long run, it tends to go up. Negative news can cause temporary drops, but if you have time on your side, these short-term fluctuations become less important.
- Buy Low, Sell High: Negative economic news can sometimes create opportunities to buy investments at lower prices. When others are worried and selling, you might find good deals. Over time, as the economy recovers, the value of your investments can rise.
- Emotional Decision-Making: If you react to every piece of negative news, you might make hasty decisions that harm your long-term goals. A relaxed approach can help you stay the course and avoid impulsive moves.
Please keep in mind this in General Advice only, for personal advice specific to you please get in touch over the phone or email.
Regards,
Chris Magnus
