Iran
Stay overweight US equities versus world, long US energy sector versus Middle East stocks, and long Canada and Mexico versus global-ex-US stocks.
Investors around Europe and North America are concerned that the stock market is increasingly overbought and vulnerable to exogenous risks. We agree and have good reasons to fear that festering geopolitical risks and the US election season will deal negative surprises.
While 2024 will see various election risks, global geopolitical uncertainty is driven by the US election and its struggle with Russia, China, and Iran. The stock market can manage local domestic political risk. But it will correct upon a major outbreak of geopolitical uncertainty.
Middle East conflict, extreme US policy uncertainty, Chinese economic slowdown, US-Russian proxy war, and Asian military conflicts do not create a stable investment backdrop for 2024. Our top five “black swan” risks may be highly improbable, but they stem from these underlying trends.
In this brief Insight we examine the expanding Middle East conflict and update the situation in the Taiwan Strait on the eve of elections. The Houthis are a distraction and China is not likely to invade Taiwan in the near term, but both situations support our overweight of US equities relative to global. Global growth is likely to slow while commodities are likely to see at least minor supply shocks.
The attacks on Red Sea commercial tankers by Iran’s Yemeni proxies, the Houthi movement, are an inflation risk inasmuch as they lengthen voyage times for any shipping forced to avoid the Bab el-Mandeb Strait. The risk of an expansion of these attacks is, in our view, limited, given Iran’s inability to project naval power in the region.
Oil prices will rise tactically due to supply risks. Recent developments indicate escalation of the conflict with Iran in the Middle East and confirm our expectation of energy supply disruptions and oil price spikes in the short run.
Global instability will continue in 2024 – whatever happens afterward. Slowing economies will exacerbate already high geopolitical risk and policy uncertainty stemming from the US election and foreign challenges to US leadership. Overweight government bonds, defensive sectors, the Americas versus other regions, aerospace/defense stocks, and cyber-security stocks.
US and Chinese oil-demand strength will offset EU weakness next year. Incremental supply growth from non-OPEC 2.0 producers, coupled with a lower risk of the US enforcing its sanctions on Iranian oil exports, reduces our 2024 Brent price forecast by $6/bbl, and takes it to $112/bbl.
Amid a range of geopolitical narratives, what matters is that the US strategy of economic engagement with its rivals is failing, giving rise to a new strategy of containment that will reinforce the secular rise in geopolitical risk. Our market-based quantitative indicators of geopolitical risk are set to rise in the coming year.