After the 7 October attacks by Hamas on Israel, investment managers at Schroders and Swiss private bank UBS assess the macroeconomic and market implications of renewed tensions in the Middle East.

Over the weekend, the Israeli government began what its Prime Minister Benjamin Netanyahu said was a "second phase" of the war, with soldiers expanding ground operations into Gaza. This will be watched closely amid concerns that it could draw more parties, such as the US and Iran, into deeper a regional conflict. 

UBS Global Wealth Management said that so far there has been a relatively muted response in safe-haven assets to the conflict. Gold prices rose 1 per cent on Friday and have not moved much since early Monday. Brent crude rose 2.9 per cent on Friday, but was down 1.3 per cent early Monday. The yield on 10-year Treasuries, which has largely failed to serve its customary role as a safe haven this time, has remained relatively stable, the bank added in a note this week. 

UBS thinks that a broader escalation of the war is likely to be avoided. But the situation in the Middle East remains in flux and markets’ risk assessment could change quickly. In addition, beyond geopolitics, the Swiss wealth manager sees reasons to add exposure to Treasuries, while both gold and oil can provide hedges against near-term volatility. The price of the metal has climbed by about 9 per cent since the Hamas attack on Israel, and a regional escalation of the conflict is likely to boost gold. 

Over the medium term, UBS expects the 10-year Treasury yield to be driven mostly by a weakening US economy and the prospect of lower policy rates. The potential for a safe-haven boost will add to their near-term appeal, UBS added. 

“We continue to see a hedging value in both gold and oil as geopolitical risks remain elevated. As a result, we advise investors to retain existing long positions in gold and consider buying dips in crude oil," Mark Haefele, chief investment officer at UBS Global Wealth Management, said.

“US Treasuries, which we expect to benefit from slowing US growth, could also be in heavier demand if events in the Middle East deteriorate. That said, our base case is that elevated geopolitical risk premiums will not last too long, so investors should add to hedges only judiciously,” he added.

This news service noted a fortnight ago that global financial markets – with a few minor exceptions – have been largley unmoved by the brutal attacks on Israel by Hamas and by the likely Israeli responses. Security analysts and those working with HNW clients have told this news service that the most significant impact is the need for travelers to be more careful about certain destinations. It may also add to other risks associated with conflicts such as in eastern Ukraine.

Oil and inflation
David Rees, senior emerging markets economist at Schroders, also thinks that oil prices need to climb much further to derail the steady decline in headline inflation. “The immediate threat to broader inflation from higher energy prices should not be overstated. Indeed, our analysis shows that energy prices account for only 1.7 per cent of core consumer prices (CPI), meaning that the direct impact of higher oil prices on underlying inflation would be minimal,” he said.

Meanwhile, with Israel having the highest number of startups per capita worldwide, over 220 venture capital funds have signed a letter of support for Israel following the terrorist attack. The statement by the Venture Capitalist stated: “We stand united in our support for the nation of Israel, and we condemn the senseless and barbaric acts of terrorism that have occurred.”

“Israel has been an enduring partner to the global innovation ecosystem, fostering groundbreaking technological advancements and startup innovation. The nation's contribution to the world in terms of technology, research, and entrepreneurship is invaluable, and we hold deep respect for its unwavering commitment to progress,” the VCs added.