What the Middle East conflict means for South Africa
Expanding conflicts in the Middle East have led to anxiety for many, but South Africans shouldn’t get too concerned as prices shouldn’t increase like they did following the outbreak of the war between Ukraine and Russia.
Israel’s conflicts have expanded beyond Gaza, with it launching a ground offensive into Lebanon and fears that it could retaliate with a missile strike from Iran.
“Despite unsettling news headlines and efforts by world leaders to de-escalate the situation, such as recent diplomatic interventions and United Nations Security Council meetings, the market reaction has been relatively muted,” said Maarten Ackerman, Chief Economist at Citadel.
“This is largely because markets had already anticipated the escalation, with many analysts predicting such developments as early as a year ago.”
Although oil prices have increased slightly, the upward trend began before the latest escalation.
Ackerman said that markets are not concerned about the potential disruption in oil supply as the Organization of the Petroleum Exporting Countries (OPEC) has reaffirmed its commitment to increasing supply by year-end, ensuring that global oil supply stays stable despite regional tensions.
That said, the Bureau for Economic Research did warn that there is a risk that the US could support an Israeli strike on Iran’s oil supplies. Iran is a major supplier of oil.
In the meantime, data from the Central Energy Fund shows that petrol prices in South Africa should drop next month.
Early data from the Central Energy Fund shows that petrol prices have posted an over-recovery of around 82 cents per litre, while diesel is also looking sharp with a 77 cents per litre over-recovery, indicating a possible six straight cut in prices.
Financial assets
“Similarly, the price of gold, a typical safe-haven asset, has seen little movement in response to the conflict,” said Ackerman.
“Risk assets have shown mixed reactions.”
While the (United States) US and European equity markets experienced marginal declines as investors adopt a more cautious stance, Asian markets have been largely unaffected, buoyed by the Chinese government’s recent stimulus measures.”
“In currency markets, we saw the US dollar strengthen slightly overnight,” Ackerman notes. “This caused the rand, approaching the R17.00/$ mark, to reverse course and start trading at around R17.46/$ as the day opened.”
Fears over the Middle East conflict could be linked to Russia’s invasion of Ukraine, which had a massive inflationary effect worldwide.
Ukraine is a significant exporter of food commodities like barley, corn, and wheat, while Russia is one of the world’s leading suppliers of crude oil, petroleum products, and natural gas.
“In contrast, the Middle East conflict does not present the same level of global commodity risk,” said Ackerman.
“The countries involved are not major suppliers of key global commodities, and OPEC’s ability to boost production should mitigate any potential disruptions in oil supply.”
“The primary risk remains the potential for the conflict to escalate further, which could negatively impact global markets if more countries or geopolitical players become involved.”
Local market performance over the last year seems to have been unaffected by the conflict in the Middle East.
“Looking at market performance over the past year, the strong returns generated suggest that markets are not too concerned by the conflict in the Middle East, at least not yet,” said Ackerman.
“However, this could change if the situation escalates or spreads to other regions.”
“Safe-haven assets, such as gold, which traditionally act as hedges against geopolitical risk, have performed well.”
“For example, the price of gold has increased by more than 30% since the conflict began. Our portfolio strategy, which includes a balanced allocation to safe-haven and risk-mitigating assets, has positioned us well to navigate the current uncertainty.”
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