Sailing into troubled waters
Since the attack on Israel by militant organisation Hamas on 7 October 2023, the Middle East has been sliding into chaos week by week. So far, the financial markets have been largely unaffected – but for how long?
Hamas, Hezbollah, the Houthi rebels, and the Islamic State – the list of terrorist organisations active in the region continues to grow. Initially confined to Israel, the scope of tensions is gradually widening. The Red Sea, Iran, Iraq, Lebanon… the first week of 2024 has seen sporadic episodes in each of these regions.
Is this the calm before the storm? So far, the impact on stock markets has been barely perceptible at global level, with oil prices, the traditional financial barometer for the region, falling by nearly 15% over the last three months. However, there are already signs of greater turmoil beneath the surface of the major indices.
Forced to turn away from the Suez Canal following a series of attacks on merchant ships, more and more shipowners are rerouting voyages between Asia and Europe via the Cape of Good Hope. The latest company to take this line is France’s CMA CGM. As a result, delivery times and rates are rising, while freight supply is drying up. All these factors are driving up the share prices of listed companies in the sector. For example, Danish company Maersk has soared by more than 30% in the space of a month, stealing a march on Novo Nordisk, Copenhagen’s star performer.
The defence and aerospace sectors have also strongly outperformed the rest of the market. Since the attack on 7 October, these sectors have risen twice as fast as the global index for all sectors combined.
These events are not easy to read, and it’s hard to see any short-term reversal in the trend. For starters, the situation in the Middle East shows no sign of abating. Secondly, interests in the region are extremely complex. What’s more, 2024 is an election year in the United States and increased involvement in the region for the world’s policeman promises to be an electoral burden for incumbent president, Joe Biden, following failed military interventions in the Arab world and Afghanistan. Lastly, the energy context in the US has seen major changes in recent decades. Long dependent on energy from the Middle East, Uncle Sam has become the world’s leading producer and net exporter of oil and gas. For the world leader in defence, the economic stakes of playing a proactive role as arbiter in the region are now much lower.
More than half the world’s population will be called to the polls in 2024, in a troubled geopolitical climate. Investors must find a way to navigate the rough seas that lie ahead.
Clément Inbona, Fund Manager, La Financière de l’Echiquier (LFDE).
Final version of 5 January 2024
The opinions expressed in this document are those of the author. LFDE shall not be held liable for these opinions.