The tense situation in the Middle East could significantly affect investors and markets, as evidenced by the sharp rise in the prices of oil and gas. In addition to geopolitics, rotation has also been a hot topic in the markets in recent weeks.
There is plenty for investors to keep an eye on in the markets – the escalating situation in the Middle East over the weekend has caused price fluctuations, especially in the equity markets. Despite a strong start to the year overall, the US equity market in particular has been weighed down by a sluggish technology sector.
Last year, the depreciation of the dollar significantly eroded the dollar-denominated returns of euro investors. That has not been the case this year, as the dollar strengthened in February and as a result of the escalating situation in the Middle East. Although the currency weakened slightly in January, it is currently close to where it was at the start of the year.
The earnings season is also of interest in the markets. In the USA, most companies have already reported their earnings, and the season has gone better than expected – earnings have increased by about 12 per cent and net sales by an average of 9 per cent. In Europe, on the other hand, the season is still ongoing. So far, the results have generally been acceptable, but there has been significant variation between sectors and companies.
The joint US–Israeli strikes on Iran and Iran’s retaliatory attacks on various Middle Eastern countries have also affected the markets. The main market impacts will come from the prices of oil and gas, which are now rising.
A sharp rise in oil prices would likely have an inflationary effect and weaken economic growth. In terms of oil price development, one crucial aspect is whether the Strait of Hormuz, located in the Middle East, remains open. Over the weekend, shipping traffic in the strait practically came to a halt, although Iran has stated that it does not intend to block maritime traffic in the strait. About one-fifth of the world’s oil passes through the Strait of Hormuz, and the deficit caused if it were to close could not be compensated for, even though OPEC+ countries are increasing their oil production.
Corporate bond spreads have also increased slightly, while the equity markets have declined. In similar geopolitical crises, the markets have typically been able to look beyond the crisis. The crisis could pass in a few weeks or months, but it is also possible that it drags on.
Beyond geopolitics, other key developments are also unfolding, most notably a renewed sector rotation, with investors shifting from last year’s winners to new themes.
In particular, small- and mid-caps have recently outperformed large companies, while value companies have gained an edge over growth companies. These are both signs of a rotation where the market’s previous leaders are losing their dominance.
Rotation is also visible when examining sectors. The technology and IT sectors, which have seen strong returns for a long time, have performed sluggishly, while the commodity, industrial and energy sectors have developed well.
Nothing presented here is or should be taken as an investment recommendation or solicitation to subscribe for, buy or sell securities. When making investment decisions, the investor must carefully familiarise themselves with the information given on the financial instruments and understand the related risks. The investor must base their decision on their own assessment, goals and financial situation. Risk is always inherent in investment activities. The value of the investment instruments may increase or decrease. The past performance of investment instruments is no guarantee of future performance.
