March 23 (Reuters) – Investors are shifting out of bonds and other assets exposed to inflation as global markets brace for prolonged disruption to energy supplies while war rages in the Middle East.
Wall Street indexes fell sharply on Friday and in Asia on Monday, stock markets in Seoul, Shanghai, Tokyo and Sydney suffered losses, dragging MSCI’s gauge of global equities to its lowest point since November. [MKTS/GLOB]
Iran has warned it would strike energy and water infrastructure across the Gulf if U.S. President Donald Trump follows through with his threat to attack its electricity grid.
Here are what investors are saying about the situation:
HOMIN LEE, SENIOR MACRO STRATEGIST, LOMBARD ODIER, SINGAPORE:
“The ultimatum is definitely playing a part in driving some of these Asian market indices lower this morning. But will he (Trump) pull the trigger? We have seen many different variations of this… it could be a spur for a more kind of aggressive diplomatic engagement, or it could literally lead to a very bad outcome for markets.
“It’s a genuinely difficult risk to respond to and does explain some risk aversion, but we have seen many episodes in the past… where you try to be too pessimistic, then potentially Trump steps back from some of the aggressive threats and the markets rally, and you miss out. So that’s not lost on the minds of investors either.”
CHIDUNARAYANAN, HEAD OF MACRO STRATEGY FOR APAC, WELLS FARGO, SINGAPORE:
“Markets were underpricing risks recently, and we see that is starting to change a bit, starting with commodities and energy. Beyond that, there is only modest expression of extended worries from market participants.
“The longer this prolongs, the concerns become twofold. One is the stickiness of commodity prices and inflation, and also the second-round impacts of elevated commodity prices hurting sentiment, hurting activity. The longer the conflict prolongs and energy prices increase sharply, markets will increasingly price in stagflationary outcomes of higher inflation expectations and lower growth expectations.”
PRIYAL MANIAR, CO-PORTFOLIO MANAGER FOR NATURAL RESOURCES, T. ROWE PRICE, BALTIMORE:
“Companies that could benefit from a rising oil cost curve and the need for new sources of production include low-cost producers with a long resource life that can offer reliable, secure supply.
“Parts of Canada’s oil patch score well on these counts. Select oilfield service companies could also be well positioned, as a greater proportion of future oil growth is likely to come from offshore and international projects.”
FRANCIS TAN, CHIEF ASIA STRATEGIST, INDOSUEZ WEALTH MANAGEMENT, SINGAPORE
“This (escalation) is causing investors to realise that we’re really not at the end of this whole thing. In fact it looks like it’s going to get worse, after Trump’s ultimatum plus the two ballistic missiles that Iran showed that it could be wider spread.
“More interesting will be whether the Middle Eastern economies are selling some gold in order to support what they are seeing as much weaker economic growth going forward. They are also one of the key investors in this AI wave, so … we may see some of these sovereign wealth funds moving towards cash.
“(Clients) are staying more defensive, taking some profits off the table, locking some of the profits that they have been seeing for the last one year-plus.”
KAREN JORRITSMA, HEAD OF AUSTRALIAN EQUITIES, RBC CAPITAL MARKETS, SYDNEY
“There was a huge lack of conviction around valuation on this market rally. And so what we’re seeing now is a fairly quick exit to the door. So if you’ve got no conviction on valuation on the way up, what happens, invariably, is when things get difficult or there’s a lack of transparency or poor outcomes, they just exit because they weren’t convinced about the prices on the way up. We’re definitely seeing the fallout from that.”
AARON COSTELLO, HEAD OF ASIA, CAMBRIDGE ASSOCIATES:
“The longer this goes on, the bigger the risk to the global economy.
“Right now, companies and countries have reserves and stockpiles, but those will eventually be depleted unless this wraps up. So markets are starting to price that.”
LORI HEINEL, GLOBAL CHIEF INVESTMENT OFFICER, STATE STREET INVESTMENT MANAGEMENT:
“We haven’t seen massive flows out of equities. We’ve seen a bit of repositioning within equities to more defensive assets like large-cap U.S., where you’ve got tailwinds to growth.
“We think the combination of the higher interest rates plus a bit of a safe haven mentality amongst investors has led to a little bit more demand for dollar-based assets.
“Before the conflict, we had seen much more repositioning into Asia … we’re not yet seeing that be unwound, but the longer the conflict goes on, the more vulnerability Asia will have because of the dependence on energy.”
VASU MENON, MANAGING DIRECTOR OF INVESTMENT STRATEGY, OCBC, SINGAPORE:
“Any strike (on power plants) and a potential Iranian retaliation, such as shutting the Strait of Hormuz indefinitely or targeting U.S. and Israeli energy infrastructure, would escalate tensions sharply and further unsettle markets in the near term.
“Oil prices have already surged more than 80% this year and could climb further if the situation worsens. Financial markets are reacting in advance, with cyclical sectors and companies which are sensitive to higher oil prices coming under pressure.
“Meaningful bargain-hunting will likely require greater stability in the region.”
CHARU CHANANA, CHIEF INVESTMENT STRATEGIST, SAXO, SINGAPORE:
“The market is starting to see this as more than just a geopolitical flare-up. Looking at Friday’s bond selloff, with Treasury and European yields jumping as investors repriced inflation and pushed back rate-cut expectations, and the market is beginning to worry about a more durable stagflationary impulse.
“That is a difficult backdrop for both equities and bonds, because it challenges the usual diversification cushion just when investors need it most. It is especially tough for long-duration sectors like tech, where higher yields compress valuations, and for mining, which faces a double whammy of weaker growth expectations hitting demand while tighter financial conditions weigh on cyclical stocks.”
MATT SIMPSON, SENIOR MARKET ANALYST, STONEX, BRISBANE:
“Trump’s latest deadline has awoken markets from their lull – and served as a timely reminder that things can escalate at the drop of a Truth Social post. Oil is the purest barometer of just how bad things are around the Strait of Hormuz. As nothing has materially changed, neither have oil prices. But what we’re seeing today on equities is complacency being punished. The fact that gold is dropping with stocks suggests it is a move to cash from other markets.”
(Reporting by Rae Wee and Ankur Banerjee in Singapore and Jiaxing Li in Hong Kong; Compiled by Tom Westbrook; Editing by Thomas Derpinghaus and Lincoln Feast.)
Comments