April2024

Israel Retaliates

implications for investors
As clearly signalled, and against the wishes of its key allies, Israel has retaliated against Iran’s attack of April 13th,
and worryingly has chosen the more aggressive approach of a direct attack on Iran rather than on its proxies. Whiledetails are currently sketchy, we provide some perspective on the implications for investors:
1. The fears of a broadening conflict, drawing in not just Middle Eastern countries but also the great powers, havebeen raised.
2. While not a zero risk, we do not believe the doomsayers are correct in predicting a much broader conflict andWWIII.
3. It is plainly in no-one’s interests to escalate war. Other than rogue states, the Iranian regime has few friends
in the Middle East or beyond and is woefully prepared with a dated and poor air defence system that is years
behind that of Israel, a message highlighted on April 13th. Unlike Israel it does not yet possess the ultimate
deterrent of nuclear arms.
4. Israel, on the other hand, has its hands full with the unfinished war in Gaza and the fight against Iran’s proxies.
The West is doing its best to calm matters and prevent further escalation, and the response to Iran’s attack on
Israel was a clear demonstration of a) the clear and continuing dominance of the US militarily and its ability toapply that anywhere of its choosing; and b) when the chips are down, Israel has the full support of the US, UK,France and other key allies in the West.
5. The early response by Iran to the attack appears to support our view that the latest developments are unlikely
to result in a broader conflict. The leadership appears to be playing down the impact of the strikes, and thedamage inflicted seems to be modest – Israel could clearly have chosen to be much more aggressive, that it
has not provides some reassurance about its intent.
6. If our assessment is correct, the main implication for investors of the instability in the Middle East will be its
impact on energy prices. This remains a risk, with potentially reduced supplies from Iran if Western sanctions
are intensified, and further disruption to shipping in the Gulf. This comes at a time when the improving
economic picture and tight supplies from the OPEC+ group of producers are leading to a deficit in oil this year,
and this could complicate the task of central banks in their battle to return inflation to targets. However, wesee this as a containable risk, mitigated substantially by the record levels of production of oil in the US and thesteady reduction globally of dependence on oil.
7. Whatever the outcome of the conflict in the Middle East, it is rarely, if ever, wise to build an investment
strategy around geopolitical risks. Aside from their inherent unpredictability, history shows that they are rarely
long-lasting, a solution is eventually found.
8. We do not ignore these risks, and we carry tail risk insurance against them in the form of gold, which has
proven to be very effective this year, but we continue to build our portfolios on the basis of valuations and longterm expectations.
9. The reaction of markets to date understandably reflects nervousness, but it is notable that after an initial spike,the oil price is broadly unchanged and while equity markets are weak, it needs to be remembered that by theend of March they had moved up by 25% from their October 2023 lows and in our view had run ahead of thefundamentals; a period of consolidation was overdue. The key to performance will be the factors which havedominated this cycle so far – inflation, growth and the Fed’s policy moves.
10. Our approach is therefore not to react to the heightened risks in the Middle East, but to maintain a broadly
diversified approach to asset allocation, including safe-haven assets alongside those offering real growthpotential, and take opportunities of weakness in markets triggered by events such as these today, to add torisk assets on weakness.

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