As Israel-Hamas War Adds to Global Instability, Here's What Investors Should Look Out For
As Israel continues its military response to Hamas’ horrific terrorist attacks, fears are growing that the war could spread into a broader regional conflict. Meanwhile, the Russia-Ukraine war continues to affect global security, as do other wars and conflicts, including increased provocations and an outright sense of war footing by China. In an October report, the U.S. Department of Defense highlighted “the importance of meeting the pacing challenge” presented by China’s “increasingly capable military.”
So it’s little wonder that International Monetary Fund chief Kristalina Georgieva told an investment conference that the war between Israel and Hamas is leading to “more jitters in what has already been an anxious world.”
In our work at Banyan Risk Group, we focus on helping clients navigate risks amid chaos and unpredictability. And our past work in both the private and public sectors, including years spent in U.S. Special Operations, has given us insight into the multi-faceted drivers of volatility in today’s financial landscape.
Here are some key factors for investors to watch out for in guiding their portfolios through turbulent times.
Iran, which sponsors both Hamas and the Lebanese terrorist group Hezbollah, is a leading producer of oil. Additional sanctions against Iran or decisions made by Tehran could lead to a disruption in output, spiking prices. If Iran-backed groups continue to conduct airstrikes in Iraq, there could be disruptions to other major oil producers in the region.
Initial fears of an immediate shock change in oil prices did not come to fruition. And some analysts are “skeptical that the U.S. would experience massive oil shortages,” since domestic production is at an all-time high, the Associated Press notes. Still, the World Bank is warning that prices could reach “uncharted waters” if the war escalates.
Investors should look into the plans that publicly listed companies have for ensuring they have energy supplies through potential disruptions. In earnings calls and conversations with investor relations representatives, push for realistic predictions of how commodity fluctuations could impact share prices.
Supply chain concerns
The Middle East plays an outsized role in global shipping. As CNBC explains, the region “is home to the world’s busiest shipping routes, including the Suez Canal, the Red Sea, the Persian Gulf and the Strait of Hormuz.”
Even a partial shutdown of any shipping routes through the Middle East could impact numerous industries. Supply chains are still recovering from the unprecedented effects of the Covid-19 pandemic. Many companies realized that they need new ways to move goods around the world, and need to step up production closer to home. But most of those new ways are still off in the future.
Now’s the time to ask companies how much their supply chains rely on routes through the Middle East, and what alternatives they have. Companies worth investing in should have sophisticated supply chain systems and robust business continuity plans for operations in this complex region.
Monitor opportunities as well as risks
During wars, some industries see higher returns. Numerous defense contractors may be in for a boon as the United States works to beef up its operations around the world. We recommend evaluating potential contractors for their alignment with authorized and appropriated defense spending plans. For example, defense contractors that produce weaponry Israel needs to defend itself and those positioned to help boost U.S. cybersecurity, as a recent White House memo outlined. Energy companies similarly tend to see higher returns during conflicts when commodity prices go up.
But no single model can predict where things will go. Traditional financial risk models aren’t sufficient to cover the myriad factors in play now. For example, China has been working to devalue the U.S. dollar, and it’s unclear how global instability could affect currency devaluations or capital flight. Also, the United States is facing political turmoil and potential government shutdowns, all on the verge of an extremely divisive election year. How a prolonged Israel-Hamas war will play into any of that is unknown.
There are also questions about Israeli companies on the stock market. The small nation has the world’s highest number of unicorn companies per capita, the fourth most companies listed on the Nasdaq after the United States, Canada, and China. Benzinga says that while investors have exited some Israeli ETFs after the Hamas attacks, they remain confident in large caps.
The most important step for investors is to keep a more careful eye than ever on the diversification of their portfolios. Look to sectors that seem best equipped to handle the turmoil, and to companies that demonstrate adaptability, agility, and the ability to respond rapidly to changing dynamics. Be more proactive in seeking answers from executives. Check in on the performance of your preferred stocks, and be ready to make more frequent moves. That's how you can help steady your own ship through uncharted waters.
David Dezso is founder and CEO of the Banyan Risk Group, and Josh Kiluk is managing director of operations. Both previously served in U.S. Special Operations Forces, as well as other roles in both the public and private sectors.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.