2 risk scenarios investors should watch out for amidst the Israel-Hamas conflict

Amidst the conflict, experts point to haven assets such as gold. 

Although the Middle East conflict has yet to greatly impact markets, experts advised investors to monitor the situation closely as an escalation could “trigger risk-off sentiment and raise volatility.”

According to the Bank of Singapore, there are two risk scenarios investors should watch out for.

First, the conflict can impact global markets through the key channel of oil prices. 

“If an escalation of the conflict drives a sustained surge in oil prices, it could result in a stagflationary shock to an already uncertain growth outlook, triggering a global growth downturn,” the Bank of Singapore reported.

“Neither Israel nor its direct neighbours are large oil producers, and so for now oil market fundamentals have not changed significantly. But oil is rightly starting to price in a risk premium to reflect rising uncertainties,” the Bank of Singapore added.

The expert underscored that before the Hamas attack, the relationship between Israel and several Middle Eastern nations had been moving towards normalisation.

“It was earlier reported that Saudi Arabia would be willing to raise oil output to help secure an Israel deal with the US. The recent events, however, could complicate efforts by the US administration to broker a deal,” the expert said. 

Another risk scenario investors should monitor is if the conflict spreads beyond the Israel-Gaza border.

“It has been reported in the media that there is concern that militias in Lebanon and Syria could get involved in the conflict, while tensions could also rise in the wider region.
There is also a tail risk that if Iran is linked to these attacks – directly or indirectly – we might see Israel come into direct conflict with Iran," the Bank of Singapore reported.

“This could result in a stricter enforcement of US sanctions on oil from Iran, which would tighten global oil supply, or even threaten the Strait of Hormuz through which a fifth of the world’s daily oil supply pass. These risk scenarios could put further upward pressure on oil prices and negatively shock the global economy and markets,” the Bank of Singapore added.

Given the uncertain growth outlook and heightened geopolitical risks, Bank of Singapore has held overall defensive stance in its asset allocation strategy heading into the final quarter of 2023.

“While the risk of near-term volatility due to the Middle East conflict cannot be ruled out, history shows the impact of these shocks alone are rarely long-lasting,” the Bank of Singapore said.