Geopolitical jitters emanating from the Middle East could trigger a 5-10% correction in the stock market alongside a surge in oil prices to $100 per barrel, warns U.K. investment bank Liberum Capital. This scenario is based on the assumption of a limited Israeli retaliation to Iran’s recent missile attack, avoiding a full-blown military escalation.
The attack, marking the first direct assault on Israel from Iranian soil, sent tremors through the financial markets. While Israel’s defenses successfully intercepted most of the threats, the potential for a forceful response has investors on edge.
Key Takeaways:
- Potential Stock Market Correction: Liberum anticipates a market correction ranging from 5% to 10% if the Israeli response to Iran’s attack remains contained. This pullback would add to the ongoing market weakness fueled by inflation concerns, rising bond yields, and a potential shift in Federal Reserve monetary policy.
- Oil Prices Poised to Spike: The investment bank expects oil prices to climb above $100 per barrel due to heightened geopolitical tensions. This prediction comes amidst a backdrop of already rising oil prices, which began the year around $71 and closed last week slightly lower at $84.67 per barrel for the West Texas Intermediate May contract.
- Defense Stocks to Shine: Liberum recommends allocating towards defense and aerospace companies, anticipating these sectors to outperform in the near term. The iShares U.S. Aerospace & Defense ETF (ITA), Invesco Aerospace & Defense ETF (PPA), and SPDR S&P Aerospace & Defense ETF (XAR) are highlighted as popular investment options within this space.
Market Rebound Hinges on De-escalation: Liberum believes a swift market recovery is likely once tensions subside and the risk of a wider conflict diminishes. The bank’s base case scenario assumes a measured Israeli response that does not snowball into a full-fledged war, paving the way for a retreat in oil prices and a market rebound.
Conclusion:
The recent escalation in the Middle East underscores the fragility of global markets and their sensitivity to geopolitical risks. Investors should brace for potential market volatility and rising oil prices in the near term. While a measured response from Israel could lead to a swift market recovery, a prolonged conflict could inflict more severe damage on financial markets. Defense and aerospace stocks could provide a hedge against this uncertainty, but investors should closely monitor the evolving situation and adapt their strategies accordingly.
