WeeklyWatch – Tensions spill over into markets

13 January 2020

Stock Take

Middle Eastern tensions

It’s been over a century since the old Ottoman provinces in the Middle East (excluding the Arabian Peninsula) were divided into areas of British and French control and influence. The Sykes-Picot line was drawn across the region, and thus the states of Syria and Iraq were born.

Who controls them now? Last week, Putin made a surprise visit to Damascus, where he was pictured meeting with Syrian President Bashar al-Assad. Meanwhile, Iraq mourned the death of Qassem Sulaimani, the country’s most powerful general and a major figure, who was assassinated under orders from the White House. While Iran preached war, its response was careful – a mere 22 rockets aimed at US bases (as opposed to personnel) in Iraq; Iran’s first direct military action against the US in 40 years was in fact designed to cool tempers. That sentiment was undermined when Iranian anti-aircraft missiles mistakenly shot down a passenger plane, killing 176 people.

Implications for investors

For investors, such rapid developments in the Middle East can be hard to interpret, and still harder to relate to economic fortunes. However, General David Petraeus, former Commander of the US Central Command (which covers the Middle East), and Director of the CIA, is uniquely positioned to comment, and told US media last week that it is “impossible to overstate” the importance of the US drone strike on Qassem Sulaimani.

Market participants may lack his expertise but, nonetheless, they were also quick to react to events – investors flocked to gold and government bonds in the wake of the assassination, but there were flows back into risk assets when Iran apparently sought a de-escalation. As for whether these flows were justified by what had transpired, some of the answers may lie in Petraeus’ comment that the death of Sulaimani was, in fact, “bigger than Bin Laden”.

Investors took heart from hopes that calm could be restored by heading back into equities, but the downing of the passenger plane (and subsequent denial by Iran) changed matters perhaps even more. As things stand, the biggest risk may yet be to the government in Tehran, if the demonstrations of the past few days are anything to go by.

Equity highs

As these events unfolded, investors took the S&P 500, Nasdaq and Dow Jones all to new highs with the US–Iran de-escalation. There were also other tailwinds, including continued US–China rapprochement ahead of the 15th January signing of a stage-one trade deal, and Beijing announcing some liberalising moves in its financial sector.

Yet there were troubles too: a new hardline Beijing representative in Hong Kong, uninspiring job figures in the US, and disappointing Christmas retail numbers for both the US and UK. Kohl’s, the major US department store, reported a 0.2% drop in sales in the last two months of 2018, while JC Penney suffered a 7% plunge in sales in the last nine weeks of the year. In the UK, similar troubles were felt at both John Lewis and M&S, and the latest GDP data showed the economy actually contracted in November.

Richard Colwell of Columbia Threadneedle, Manager of the St. James’s Place Strategic Managed fund, commented:

“Since the 2016 EU referendum, the UK equity market has felt like the land that time forgot. Greater clarity over Brexit and UK politics should not only spur an immediate stock market rally but also encourage a longer-lasting reappraisal of UK-listed companies. UK valuations are at 30-year lows compared with international equities as a whole, touching levels last seen in the early-1990s recession when judged by a range of measures. Similarly, sterling is now back at a 34-year low against the dollar.”

Wealth Check

Loyalty may start paying – millions of savers who leave money in the same account for years should get a better deal under new plans proposed by the Financial Conduct Authority.

The FCA’s proposals, which could take effect in 2021, are designed to overcome the problem of savings rates being slashed at the end of an introductory bonus period. It would mean banks have to introduce a single long-term interest rate that is paid to both long-standing customers and those whose introductory offer had just ended, helping consumers pocket an extra £260 million a year.

It’s estimated that 70% of savers leave their money in the same account for years, sometimes receiving as little as 0.1% in interest, as banks gradually reduce rates over time.1

Phil Woodcock, Head of Investment Communications at St. James’s Place, said:

“These changes would be some welcome news for cash savers, but the outlook is still pretty bleak. The average easy access account rate is currently just 0.60%. The risk in holding cash as part of a long-term strategy is that the interest doesn’t keep pace with inflation, so the spending power of your money is reducing.” 2

The proposals came in the same week that three members of the Bank of England’s Monetary Policy Committee said they may be willing to cut interest rates at the end of this month, depending on how the economy has performed since the General Election.

1 FCA report, 9 January 2019
2 Moneyfacts, December 2019

In the Picture

Crises in the Middle East can have a major impact on the flow of oil worldwide and, in turn, on global markets. A third of the world’s reserves are in this region and are largely grouped in countries that border the Persian Gulf, making the politics of just a few countries all the more impactful globally.

The Last Word

A writer who says that there are no truths, or that all truth is ‘merely relative,’ is asking you not to believe him. So don’t.

Roger Scruton, who died at the weekend.

The information contained is correct as at the date of the article.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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