January 3, 2020— On January 2, a U.S. military drone strike eliminated General Qassem Suleimani, leader of the al-Quds battalion of Iran’s Islamic Revolutionary Guard Corps (IRGC). The drone strike, which occurred at Baghdad airport, followed a rapidly escalating U.S. conflict with an Iranian-backed Iraqi militia. The al-Quds forces advance Iran’s influence by supporting various governments and militias across Syria, Iraq, and Yemen. Iran has threatened unspecified retaliation against U.S. interests.

As one might expect with any unanticipated event of this nature, the drone strike precipitated a spike in oil prices, a drop in global equity prices, and an appreciation of safe-haven currencies. We anticipate that these market impacts, as well as those associated with any likely retaliatory action, will be modest and short lived, for the following reasons:

The most impactful market impacts would come in the form of new attacks on Saudi oil facilities

This is because Saudi Arabia is Iran’s major regional nemesis, particularly under the leadership of Crown Prince Mohammed bin Salman. It is also a U.S. ally that has recently been hosting U.S. troops. Iran or its proxies have already attacked Saudi oil facilities last year and could do it again. However, Saudi Arabia showed great resilience in quickly recovering oil production. Oil prices remained elevated for a few weeks. Pinprick attacks by the IRGC on Gulf shipping have likewise only had modest, short-term impacts. Also, it should be noted that other major oil-exporting countries, including Russia, could temporarily increase production to help soften the impact of Saudi outages. (See our related blog post, “Drilling Deep into the Energy Sector” on whether it is a good investment or a trap to be avoided.)

Any potential impacts on emerging markets equities are likely to be very modest  

Saudi Arabia’s recently listed state oil company, Saudi Aramco, comprises only 0.14% of the emerging markets index, due to foreign investment restrictions. Of course, Iranian retaliation could also extend beyond Saudi Aramco facilities; however, as a whole, Saudi Arabia comprises only 2.5% of the emerging markets index. Qatar and the UAE are negligible components of the emerging markets index and are less likely to be attacked. Iran and its allies are not index components.

It isn’t unreasonable to expect a surge of Iranian cyberattack attempts on U.S. military and civilian targets

Iran and the U.S. have been engaging for many years in low-level cyberwarfare, mainly to test each other’s defenses. Additionally, cyberwarfare had been used to slow the progress of Iran’s nuclear program. While the U.S. has strengthened its defenses, successful Iranian cyberattacks are possible, and could disable some individual companies and perhaps even some infrastructure, but likely only on a temporary basis. We believe the threat of a devastating U.S. counterattack might cause Iran to modulate the extent of its cyberattacks. We thus expect any market impacts of Iranian cyberattacks to be modest and diffuse.

Iran will likely seek to avoid triggering a direct, more devastating war with the U.S.

In the wake of the drone strike, we believe Iran would want any responses to be viewed by Europe, Russia, and China as retaliatory without being escalatory. Iran will want to protect the trade-opening gains it has made with these countries as a result of the Iran nuclear deal. Further, Iran likely believes that, through its proxies, it has already achieved (or made substantial progress toward) its goal of being the preeminent outside power in Iraq, Syria, and Yemen, and will want to preserve these gains as well. Thus, Iran probably believes that a devastating war with the U.S. could undermine Iran’s regional influence. We should take some comfort in the fact that the U.S. and Iran have successfully managed to avoid a direct war since the 1979 Iranian Revolution.

Market reactions to 20 Middle east crisis events over the past three decades


Data as of January 3, 2020

Sources: Kensho, CNBC analysis.

Core narrative

Currently, the global economic environment favors global equities, which motivates our overweight to equities, particularly to developed international equities. A Phase 1 U.S.–China trade deal is completed, China is introducing financial stimulus, a no-deal Brexit has been avoided, moderates are in power in Europe, U.S. markets are taking impeachment in stride, and global monetary policy is generally accommodative. The proverbial “wall of worry” is quite low. There is never a time when Middle East conflict is desirable, but there are times when such a conflict may be less impactful on markets, and now is one.



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