Israel responds

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What happened?
Israel carried out strikes against Iran in the early hours of Saturday, in response to Iran’s missile attack in early October. Israel’s strikes targeted military bases, and no damage to energy or nuclear facilities was reported.

The Biden administration indicated it had advance knowledge of the strike but did not participate, and urged Iran to refrain from responding. Saudi Arabia, while condemning the strikes, warned against further conflict.

Our view
In our base case, we expect global markets to be occasionally affected by the conflict in the Middle East, but do not assume that the conflict will expand to an all-out war between Israel and Iran, including their respective allies. We also assume that energy flows from the Middle East will continue without sustained interruptions.

While Saturday’s strikes appear to be more extensive than those carried out in response to April’s missile attack, markets are likely to be reassured that Israel targeted military installations, rather than choosing more aggressive options, such as targeting Iranian leaders, energy or social infrastructure, or nuclear facilities.

That said, Iran may nonetheless feel compelled to respond, in order to convey strength to its population and allies. Investors will therefore need to continue to monitor the risk case of the conflict expanding to an all-out war, including the potential for broader involvement given the complexity of regional alliances.

Investment implications
Generally, we think it is important for investors not to let geopolitical concerns obstruct the view on what we believe is an otherwise positive outlook for global markets. As long as the conflict remains contained to the region without a direct impact on the global economy, we believe that markets are likely to focus on other drivers.

We recently lifted equities to Attractive in our global asset class preferences, given a benign global growth economic outlook, Federal Reserve rate cuts, and supportive structural trends. A balanced portfolio can help investors stay invested while mitigating exposure to individual risks.

To hedge against geopolitical risks specifically, we believe investors should consider adding portfolio exposure to gold and oil.

While the price of gold has risen more than 32% this year, we expect further upside and target USD 2,850/oz by mid-2025. The Federal Reserve’s rate-cutting cycle driving financial investment demand and ongoing central bank purchases should support the metal as well.

Brent crude prices fell 4.5% Monday morning in Asia after Israel's weekend strikes on Iran did not target crude facilities. This so far stands in contrast to our risk case scenario, where disruption to major oil supply routes like the Strait of Hormuz or damage to critical oil infrastructure could see Brent crude prices break above USD 100/bbl. Beyond geopolitics, we believe that the market currently is focusing too heavily on risks to oil demand and not enough on underwhelming global oil supply growth.