Middle East & North Africa
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 market’s pricing of a soft landing means that geopolitical risks are becoming more, not less, relevant in 2024. US domestic divisions will invite challenges as foreign powers rightly fear that US policy will turn more hawkish after the election.
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.
A series of notable events took place over the Thanksgiving holiday but none of them force us to change our fundamental assessments. The conflict in the Middle East is likely to escalate rather than de-escalate, while the Taiwan Strait has at least a 50/50 chance of seeing tensions escalate next year.
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.
Investors should reduce risk, increase allocation to safe havens, and brace for oil price volatility and supply disruptions stemming from the Middle East over the next zero-to-12 months.
Economic fragmentation will accelerate in the wake of the Israel-Hamas and Russia-Ukraine wars. China’s fis-cal support for its economy; a still-strong US economy, and the preparation for a wider war in the Middle East involving Iran will elevate volatility and bias oil prices upward. We remain long equity and commodity exposure via the XOP, XME and COMT ETFs.