At time of writing, this last Friday of March, we have no idea what next week will bring. When the US and Israel attacked Iran, the hope was that the conflict would be short-lived, but now it seems like it might spiral into something more substantial. Just like we saw with the war in Ukraine where Russia misjudged the resilience of the Ukrainians, we see the tenacity of the Iranians. Unlike the Russia/Ukraine war, where the fear was a shortage of grain and natural gas for Europe coming out of Ukraine and Russia, the war with Iran is blocking the flow of oil, which is many times more damaging to the world economies than grain and natural gas.
If it were not for oil, and Iran’s ability to block the flow thereof through the Strait of Hormuz, this conflict would not have been that important. So why is oil that important? Simply put, less oil means higher oil prices which means higher production costs which means higher inflation, interest rates and ultimately recessions. Nobody knows when the oil will start flowing freely again, which in turn creates all the uncertainty resulting in the following:
- A stronger dollar and weaker rand. As a South African investor with dollar investments, this creates some sort of buffer against equity price declines.
- Higher bond rates and a freeze on lowering interest rates; which is bad for the consumer with debt.
- The stronger dollar means a weaker gold price, which is bad for all the people who bought gold and silver and for the potential tax revenue lost by SARS.
- Higher oil prices means higher petrol prices.
- The higher petrol and diesel prices will translate into a higher cost of living.
- Investors sell shares when they don’t know what is going to happen and we have seen the decline in the value of portfolios.
This is not the first time oil has been the centre of attention. If you look at the graph below, you will see that oil has been the cause of panic many times in the past and eventually the problems are resolved. As before, companies are sold indiscriminately in times like these, creating opportunities for the longer-term investor. What will happen now, is that fund managers will have specific values on companies they believe reflect a good buying opportunity. They will wait for those levels to be reached and then start buying these oversold companies. In time, when things normalize, these purchases will drive the performance of those funds. The losers will be those fund managers or investors who became paralyzed by fear and never started buying into the weakness created by the uncertainty.
By the time you read this, Trump could very well have decided to deploy troops in Iran, which could potentially create a further 10% drop in the equity indexes, or, he could by some miracle convince the Iranians to agree to some kind of ceasefire, which will see share prices shoot up. We have to just live through this insanity and wait for normality to return.