The recent events in Israel have been appalling to witness, with Hamas fighters breaching the border and killing many Israeli civilians. The Israeli military has responded with airstrikes in Gaza and a costly ground incursion by the Israeli Army is likely. Meanwhile the prospect of conflict with Hezbollah on its Northern border raises the prospect of Israel having to fight two conflicts simultaneously. The spectre of a wider conflict with Iran, dragging in the US and potentially other actors like Russia, hangs over these ongoing events.
As tragic as the events on the ground have been, the question for us as investors in response to any geopolitical event like this is the same: what does this mean for markets and how should we respond?
So long as the conflict remains contained within the borders of Israel-Palestine, we do not see any likelihood of a significant impact on global markets. The most likely scenario which would have global implications to markets would be an escalation of the conflict to involve Iran and a potential direct confrontation between Iran and Israel.
Iran is a big supplier of oil into global markets, but more significantly than this, it is located at a strategically important part of the world for global shipping routes. Iran has previously threatened to close these routes to ships and has in recent years even hijacked ships passing near its coastline. A major escalation between Israel and Iran would inevitably drag the US into play as a backer of Israel, which raises the prospect of major interruptions to global supply chains if Iran were to make a play to close (or at least try to close) shipping routes through the Middle East.
This latest escalation in geopolitical tension follows on from Russia’s invasion of Ukraine last year which shocked the world. That war still rages on, with Ukraine’s most recent offensive getting bogged down by heavily fortified Russian positions and a Russian military which, counter to much of the media view on the conflict, has been adapting and learning. Resolution to that conflict looks as far off today as it did last year.
In Asia, the prospect of a Chinese invasion of Taiwan hangs over the region and weighs on investor sentiment globally. Such an act by China would have global implications. Taiwan is central to the global supply of semiconductors and a major interruption to this would have a dramatic impact on the supply of goods and services across virtually all industries, in all countries. Further, it raises the prospect of a direct military confrontation between the United States and China.
All of this sounds scary, right? Yes, it does. War is terrible and the risk of big wars between nation states is bad news for all of us.
However, is there anything new happening here that hasn’t happened before?
No, is the short answer. It is easy in the age of social media and 24-hour news to think that we are living through especially dangerous times today. But this is simply not true. In fact, even factoring in the war in Ukraine, escalation in the Middle East, and prospect of war in Taiwan, these are particularly peaceful times relative to almost any other moment in history.
Your author’s grandmother remembers war between the UK and Germany, a global conflict dragging in Soviet Russia and the United States, ending with 60 million dead. The prospect of war between the UK and Germany today is pretty much non-existent, both nations are close allies and modern democracies.
And investing in equities as a long-term investor back then, when Western Europe was going to war with itself, would have been a great investment. Long-term returns from investing at those lows have been excellent, as the post-war democratisation of Germany, peace in Europe, and strong economic growth since has rewarded the optimistic and patient investor.
Despite the legitimate concerns today about the geopolitical situation, we urge investors not to be overly cautious in response. Patient optimism has worked through much worse conflicts, through times where the world has been much more violent and where the risks were much greater.
Keep calm and carry on!