A Senior Investment Strategist has provided a timely roadmap for two possible outcomes for the current Middle East conflict.
Cameron Gleeson, Betashares, said geopolitical events like this can create sudden swings in markets.
This has certainly been felt throughout March.
In a report released yesterday, he outlined two potential paths for markets: a prolonged conflict and disruption to global oil supply, or a de-escalation within a matter of weeks.
He also highlighted several ASX ETFs that may help investors position their portfolios accordingly.
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How does the current conflict impact ASX portfolios?
There are several reasons the current conflict in the Middle East is influencing markets.
The most immediate influence to markets is typically energy prices, which have had significant movement this past week on mixed messages from the Trump administration and Tehran's defiance.
According to the report from Betashares, impact to global oil supply can quickly influence other areas of the economy like inflation expectations, central bank policy and the global growth outlook.
Here are two possible outcomes and how investors could adjust their portfolios.
Its important investors understand these scenarios are illustrative only and not predictions.
Potential path one: Prolonged conflict
Mr Gleeson said if tensions escalate and oil shipments through the Strait of Hormuz face sustained disruption, energy prices may remain elevated for some time.
According to the report, even if Trump succeeds in dismantling Iran's nuclear program and triggering regime change, the outcome could still create a power vacuum in which factions within Iran continue to threaten energy shipments.
If you are looking for the single most important indicator of risk in this crisis, it's the price of oil. Oil's reaction has been volatile, but some investors have tried to use it as a "geopolitical hedge" for when other asset valuations come under pressure.
The ASX ETF that offers the most direct exposure to changes in the price of oil is the BetaShares Crude Oil Index ETF – Currency Hedged (Synthetic) (ASX: OOO).
The Motley Fool's Sebastian Bowen provided a thorough breakdown of the fund and its positioning relative to the current conflict earlier this month.
Other ASX ETFs that may be worthy of consideration if you expect a prolonged conflict and ongoing oil crisis include:
- BetaShares Global Energy Companies ETF – Currency Hedged (ASX: FUEL) – Provides exposure to some of the world's largest oil and gas producers, with significant production outside the Gulf region.
- BetaShares Global Agriculture Companies ETF – Currency Hedged (ASX: FOOD)
- BetaShares Gold Bullion ETF – Currency Hedged (ASX: QAU)
Potential path two: De-escalation
Mr Gleeson said alternatively, if tensions ease quickly and shipping through the Strait of Hormuz resumes uninterrupted, oil prices could retrace and the geopolitical risk premium embedded in markets may fade.
In that environment, global equities and cyclical sectors could benefit from improving sentiment and a renewed focus on economic growth.
A rising tide lifts all boats and one might expect all equity markets to rally, but below we identify some of the higher beta opportunities for such a recovery.
Some ASX ETFs mentioned include:
- Betashares Msci Emerging Markets Complex Etf (ASX: BEMG)
- Betashares Global Shares Ex Us Etf (ASX: EXUS)
- BetaShares Geared Australian Equity Fund (Hedge Fund) (ASX: GEAR)
He highlighted that historically, emerging markets have performed strongly when global risk appetite improves and trade flows normalise.
Additionally, Ex-US equities provide greater exposure to cyclical sectors like financials and industrials than the US equity market and, as such, greater exposure to a strong global growth environment.
