An Update on Middle Eastern Developments and Stocks

Nearly 11 months in, the conflict between Israel and Hamas grinds on and continues threatening to pull in the broader region—keeping investors and commentators we follow on edge. Our research suggests Iran’s potential involvement contributed to a short market pullback in April, and now publications we follow are again focussing on that nation after weekend strikes between Israel and Hezbollah, a Lebanese militia and one of Iran’s proxies.^[i] The situation appeared to de-escalate Monday, whilst ceasefire talks between Israel and Hamas continued, but we still see plenty of lingering nervousness.^[ii] This is understandable, in our view, and an escalation could add to the devastating human toll. Yet markets, which we find to be cold-hearted and callous, seemingly moved on a long time ago.

Exhibit 1 shows Israeli and global stocks since the end of August 2023, a few weeks before the 7/10 attacks touched off the conflict. As we find typical in these conflicts, there were wobbles when the fighting began. Israel’s markets plunged on 9 October, the first trading day after the attacks, and fell further in the next few days as markets appeared to size up the likelihood of a difficult, protracted and costly (in every sense of the term) campaign.^[iii] Global markets initially rose, then pulled back from mid to late October as armed conflict in the region grew likelier.^[iv] But stocks’ fall ended on 27 October.^[v] Less than a month later, Israeli stocks were back at pre-7/10 levels, and global markets were up.^[vi]

Exhibit 1: Markets and the War in the Middle East

Source: FactSet, as of 26/8/2024. MSCI Israel and MSCI World Index returns in GBP with net dividends, 31/7/2023 – 31/7/2024. Indexed to 100 at 31/7/2023. Please see our Annex below for an extended, five-year version of this chart.

Since then, both have continued rising, albeit with volatility.^[vii] The wobbles are more pronounced in Israel, especially during the April escalation with Iran, given its narrower market and Israeli companies’ heightened exposure to the fighting.^[viii] But the bull market (long period of generally rising equity prices) has continued both globally and locally: Since market close last 6 October, Israeli stocks are up 21.0% in pounds (27.5% in shekels), and global stocks are up 19.7% in pounds.^[ix]

We doubt this suddenly changes. Israel’s TA 35 index fell just -0.64% in local currency Monday and -0.02% Tuesday, much milder than Israeli stocks’ early declines last October and April.^[x] We don’t think it is even clear that the weekend’s military activity and Iran’s saber-rattling are why—the driver of daily movement is always hard to pinpoint, in our view. But global volatility was also muted, with markets in North America, Europe and Asia either ticking up a bit or easing down a bit.^[xi] If the risk of big, market-disrupting conflict were suddenly higher, we doubt that would be the case. Instead, it seems to us the war is losing its ability to swing sentiment noticeably.

Based on our research, this is how these things typically go. Regional conflict is tragic and terrible, always, with a dreadful human toll. The destruction to lives and property is awful. But we find markets don’t weigh the human cost. These factors may hit sentiment hard when conflict appears likely, but our research shows the effect is typically short-lived. In our view, markets quickly weigh the economic impact and its likely effect on corporate earnings over the next 3 – 30 months. As it becomes clear the fighting will stay isolated in a tiny sliver of the global economy, we think stocks move on. This time, with the fighting concentrated in a sliver of a region that generates a small share of global gross domestic product (GDP, a government-produced measure of economic output), we think stocks moved on quickly.^[xii]

Some commentators we follow noted Monday’s rise in crude oil prices and pinned it on the weekend’s strikes and Iran’s potential involvement.^[xiii] Perhaps this contributed to market projections for supply disruptions, but we suspect events in Libya played a greater role. Currently, the country has two competing governments—one in Benghazi, and one in Tripoli, which is the administration recognised in the West. The two sides are currently locked in a dispute over the country’s central bank chief, and the Benghazi administration announced it will shut down Libyan oil production and exports. Should production remain offline, it would shave about 1.2 million barrels per day off global supply.^[xiv]

We doubt this leads to another 2022-style crude price spike, given Libya amounts to about 1% of global production, and output elsewhere is growing enough to more or less offset.^[xv] OPEC (the Organisation of Petroleum Exporting Countries and its partners) also has spare capacity and continues flirting with raising production targets.^[xvi] It wouldn’t surprise us if oil prices rose a bit further from here, as we think the global demand concerns that appeared to weigh on crude over the summer are overstated, but we doubt a massive move awaits.

Annex: Global Stocks and Israeli Stocks, July 2019 – July 2024

Source: FactSet, as of 26/8/2024. MSCI Israel and MSCI World Index returns in GBP with net dividends, 31/7/2019 – 31/7/2024. Indexed to 100 at 31/7/2019.