Considering Broad Investment Implications of US/Iranian TensionsJan 7, 2020

 

Our senior investment leaders recently met to discuss rising US/Middle East tensions. They share a few initial thoughts on the potential market implications.

Following the January 3rd US airstrike near Baghdad airport, which killed Iranian General Qassem Soleimani, we convened a meeting of our senior investment leaders across various Franklin Templeton investment teams—including several of our Middle East-based investment professionals—to consider the market implications of recent events.

General Soleimani was the commander of the QUDS Force in Iran’s Revolutionary Guard Corps (IRGC), which oversees Iran’s foreign-facing military actions. He was commonly viewed as the second most powerful person in Iran, after Supreme Leader Ayatollah Ali Khamenei. His assassination heightened tensions in the Middle East, and is likely to push the regime in Tehran to decide how to respond to this action.

Unsurprisingly, we found a range of opinions within our various investment teams about these developments, stretching from concern about the potential for an increase in longer-term risk to a more sanguine view of a rational Iranian response to this action. Importantly, numerous other world powers—notably France, Britain, Germany and China—have expressed positions that are supportive of near-term de-escalation of current tensions. This opens the door to possible diplomatic solutions.

Tensions between the United States and Iran actually seem to have been increasing since last summer, largely through a series of proxy attacks, including those on oil tankers in the Strait of Hormuz, oil infrastructure in Saudi Arabia, and more recent attacks on US facilities in Iraq.

We believe the recent US airstrike may indicate a shift in US policy disallowing Iran’s stance of “plausible deniability” as it relates to proxy actions. It remains uncertain whether making Iran responsible for the actions of its proxies will truly act as a deterrent to further asymmetric threats by the Iranians, particularly while they remain under pressure of severe economic sanctions. However, preservation of the Islamic Revolution appears to remain the Iranian leadership’s primary objective.

The market reaction thus far has been more modest than we would have anticipated, and suggests that, in the absence of a retaliatory act by Iran, investors expect that this period of tension will pass. That said, we would note gold prices have been moving up over the past month, which in some part, can be attributed to increasing tail risks, including geopolitical tensions.

We would also note that when a new piece of information or an occurrence such as this is introduced, investors may reassess positions or rotate exposure into different holdings or sectors. This catalytic effect may result in changes that seem only tangentially linked to the situation at hand.

As a broad characterisation, our equity investment teams were more sanguine about the outlook and our fixed-income teams saw the potential for heightened risk-premia in global markets.

Broadly, from a Global Macro and Multi-Asset Solutions perspective, we are focused on the potential for the tails of the distribution of potential market outcomes (from the most negative to most positive ends of the spectrum) to become “a little bit fatter,” emphasising the importance of protecting the downside if events don’t follow the more likely benign path that we all hope to see.

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This material reflects the analysis and opinions of the author(s) as of the date of this publication and may differ from the opinions of other portfolio managers, investment teams or platforms at Franklin Templeton. It 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.

The views expressed are those of the investment manager(s) and the comments, opinions and analyses may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, security or strategy. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy.

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What Are the Risks?

All investments involve risks, including possible loss of principalThe value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds adjust to a rise in interest rates, the share price may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging market countries involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Such investments could experience significant price volatility in any given year. High yields reflect the higher credit risk associated with these lower-rated securities and, in some cases, the lower market prices for these instruments. Interest rate movements may affect the share price and yield. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; their interest payments and principal are guaranteed.

 

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