Clancy Yeates is Deputy Business Editor at The Sydney Morning Herald, covering banking and financial services.
Fund managers have warned of the potential for the Israel-Hamas conflict to spiral into a wider regional war, a scenario that could send oil prices soaring and inflict a major shock on a global economy already straining under higher interest rates.
As the conflict continues to weigh on market sentiment, investors this week told an event held by philanthropic investment manager Future Generation that there remained a high risk of a broader conflict in the Middle East, potentially one involving the United States and Iran.
Magellan portfolio manager Nikki Thomas said she thought there was a higher than 50/50 chance of the conflict worsening, which could occur by Israel’s military moving into Gaza, which would likely spark more attacks on Israel’s north from militant group Hezbollah.
“The issue then becomes can Israel fight a war on two fronts, and if they can’t, and they don’t feel comfortable… they will reach to the US and say, we need your troops to help us. And the US will, in our view, do what we would expect them to do and say, yes, we’ve got your back,” Thomas said.
“So you suddenly get the US entering a war, which means you then have Iran entering the war, and this escalates to something really nasty.”
Thomas said the humanitarian situation was “horrific,” but the main financial impact of a wider conflict would be on the oil price, which she believed would rise “dramatically,” feeding into higher inflation and raising the risk of recession.
“I don’t want to scare people, and we shouldn’t panic, but risk is elevated in markets at the moment and I think we’ve got to be really cautious about how this plays,” Thomas said on a panel session moderated by this masthead.
Global oil prices have risen since Hamas attacked Israel earlier this month, with Brent Crude fetching $US87.93 on Friday. Treasurer Jim Chalmers has also warned the conflict could drive up oil prices and result in more expensive petrol.
Antipodes Investment Management chief investment officer Jacob Mitchell told the summit the best way for investors to hedge against a surge in oil prices was to invest in oil stocks.
On top of the heightened geopolitical risks, Mitchell said the economic environment was also weak, as central banks around the world raise interest rates. “We’re facing a weaker economic environment, even setting aside what’s happening in the Middle East,” he said.
Mark Holowesko, chief executive of Holowesko Partners, also viewed the Israel-Hamas conflict as a key risk, saying he thought the likelihood of Israeli forces entering Gaza was “very high.” Holowesko warned higher oil prices could worsen the inflation problems in the US, threatening to keep interest rates “higher for longer.”
“Higher oil prices will tend to keep inflation higher than I think the Federal Reserve wants in the United States, and I think the Federal Reserve already wanted interest rates to be structurally higher, regardless of the inflation outlook. So I think that just keeps rates higher for longer,” he said.
Magellan, Antipodes and Holwesko all manage money for Future Generation, an investment manager that gives investors access to portfolios managed by a group of fund managers, who are working pro bono, with 1 per cent of its assets given to charities.
The panellists were more divided in their views on China. Thomas said China’s economy was “fraught with risk” as the country grappled with weak consumer confidence and high savings rates, while Mitchell said that despite the risks he thought some exposure to China could provide investors with diversification.
The Age and The Sydney Morning Herald are media partners of the Future Generation Summit.
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