We at the Franklin Templeton Institute and the firm acknowledge the humanitarian crisis unfolding in the region. These are sad and challenging times, when it is not easy to detach and draw implications for the global economy and markets. That said, it is our responsibility to focus on those implications and what it means for investors.
We do not see wider economic or market impacts stemming from the conflict in its current form. Unlike Russia’s invasion of Ukraine, with its significant direct and indirect impacts on global supplies of energy, fertilizer and food stuffs, the war between Israel and Hamas—assuming it does not spread into a wider regional conflict—will likely cause few, if any, significant disruptions to global supply of critical goods. Even its impacts on Israel’s vibrant technology and pharmaceutical sectors are likely to be modest, with few adverse impacts on those industries at a global scale.
For example, Israel’s computer chip production accounts for only about 1% of total global industry output.1 To be sure, some loss of production may result from labor shortages, as some 300,000 reservists are called up across Israel (and from abroad). Hence, it is difficult to believe that some level of disruption to production can be avoided, in those sectors or elsewhere in Israel’s economy.
At times like these, energy supply and price shocks are never far from investors’ minds. Memories remain of the experiences during the 1970s. During the 1973 Arab Israeli war and again in 1979 following the Iranian revolution, embargoes and other dislocations disrupted oil supplies from the Middle East. In the event the current conflict was to escalate beyond its present scope, oil prices could spike and, potentially, supplies could be disrupted.
But in contrast to the episodes from 50 years ago, regional politics and alliances have changed. Relations between Israel and the United Arab Emirates (UAE) have improved in recent years. This year, expectations were emerging of a similar thawing of relations between Israel and Saudi Arabia. Even if formal ties have been postponed by the current conflict, the reality is that the Arab countries of the Persian Gulf are less likely to move against Israel and the United States and use oil production and distribution as a weapon.
Indeed, the muted response thus far of major regional actors such as Turkey, Egypt, Saudi Arabia, Qatar and the UAE to the war between Israel and Hamas attests to the different nature of regional politics and alliances. Sympathy for the plight of innocent civilians is surely one reason. But so, too, is the concern shared in many parts of the Middle East that war, conflict, and potential refugee crises are best avoided.
That is not to say that some actors may see benefit from conflict. Russia is keen to divert world attention from its invasion of Ukraine. It also hopes that the West may soon tire of waging wars, even by proxy, on multiple fronts. Any number of regional groups might wish to exploit the conflict for political gain. The region, understandably, remains fraught with uncertainty, and escalation can never be ruled out.
One possible way to imagine a widening of the conflict is via Iran, which has been a long-time supporter of Hamas. Were Iranian-backed militants in Lebanon (e.g., Hezbollah) or elsewhere to attack Israel, counter strikes from Israel could escalate the conflict into a regional war. Iran might then attempt to militarily disrupt or sabotage Persian Gulf oil production and shipments via the Straits of Hormuz. In such scenarios, oil prices would surely jump, as would market risk premiums.
It is therefore in the economic interests of Israel and its allies (the United States and Europe) to pursue its national security interests. At the same time, it is also in the interests of Israel and its allies to not unnecessarily escalate the conflict.
The United States has thus far managed to both provide unequivocal support for Israel and to urge restraint. The United States has warned potential adversaries not to exploit the situation. It is impossible to say with certainty, or even high conviction, that those messages will be heeded or that Israel will refrain from risky escalation in the event it is again attacked. But there is reassurance in the knowledge that the region’s powers are aware of the potential for missteps and are likely to avoid them.
The last thing we would highlight is the likelihood that this increase in the global geopolitical temperature will accelerate the trend towards regionalization of trade. Reshoring has been driven largely by a desire for each country to create strategic stability after the experiences around COVID and the Russia/Ukraine war.
In sum, as horrific as the images have been and continue to be, the risk of major disruptions to the world economy stemming from the Israel-Hamas conflict appear, at present, to be contained. While we and investors must remain vigilant regarding those risks, we do not believe that the conflict in its current form is likely to have significant impacts on global economic growth, inflation, corporate profits, interest rates or exchange rates.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
_____
1. Source: OEC (Observatory of Economic Complexity) as of October 13, 2023.
