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Client Email - 27th October 2023

It was interesting to read this week the comments from Ruchir Sharma, the chair of Rockefeller International, and his views that the message the markets are sending now is, in their view, that the worst fears on an escalation in the conflict in Gaza will not come to pass. We have seen more market volatility this week as we await earning reports from some of the big US tech firms, however financial markets have mostly been subdued in reaction to the conflict in Gaza.

Stock markets closest to the region, from Saudi Arabia to Egypt and the Gulf states, have experienced only moderate pullbacks. There has been no rush to safety in bond markets, where prices have been falling, and little drama in oil prices either. It is as if the markets think the conflict will fall short of the worst fears, as is often the case in geopolitical crises.

Once again, I must underline that we are in no way ignoring or belittling the cost of human life in these conflicts, but from a portfolio management viewpoint, the past is an important tool in informing the months ahead and giving us insight into how markets might react.

Sharma’s research showed that looking at the stock market reaction to 25 of the most significant geopolitical crises since the second world war, including cross-border conflicts from Korea in 1950 and acts of terror from the first World Trade Centre bombing in 1993, the S&P 500 dropped from peak to trough within 15 days, but recovered fully in 33 days. Sixteen of these events took place in the Middle East or stemmed from conflicts or terror groups there — such as the bombings on public transport that hit Madrid in March 2004 and London in July 2005. After an initial impulsive sell-off, the market usually recovered the losses quickly. This is part of our role – to keep clients invested through periods of market turmoil, if we believe better times are ahead.

If we look past the conflict in Gaza, the bigger worry again is higher for longer interest rates. As a group, investors seem to react differently to crises than individuals do. For individuals, history is remembered as better than it is lived. The mind tends to forget moments of uncertainty and recall the past as the good old days. Against memories that grow sanitised with time, the latest crisis will stand out as especially dangerous in the here and now. This is not irrational: in the heat of the moment, the outcome is always unclear. When the head of the UN speaks of a Middle East “on the verge of the abyss”, and seasoned geopolitical analysts dramatically raise the odds on a wider conflict, it is not irresponsible for people to spread the warnings on social media.

The filtering of memory is a survival instinct, as is the urge to broadcast present dangers. The collective mind of the market, in contrast, recognises geopolitical risk as a historical constant, and frames fraught moments in that context. Is it clear, for example, that the Middle East is more precarious now than during any of the major conflagrations there since the second world war? That Russia is a more dangerous power after the loss of half its combat capacity in Ukraine? That China is a greater threat today, despite the steady weakening of its economy? The sum total of these threats is highly uncertain and debatable; the market, an aggregation of millions of views, is inclined not to rush to judgment.

In the late 1990’s, then legendary investor Julian Robertson spoke about the hopes for world peace that followed the collapse of the Soviet empire that were subsequently erased by new risks, including India and Pakistan carrying out a series of nuclear tests. Robertson advised at the time, not to overreact. He cited his own conversations in the early 1990s with the former UK prime minister Margaret Thatcher, who told him of a risk that the Soviet Union could have used its nuclear arsenal in a last-ditch attempt to prevent the disintegration of its empire. His point was that dire threats are ever present, even in periods remembered for tranquillity, but ultimately rarely materialise. Instead, events force leaders to take steps to prevent escalation. The understanding of geopolitical crises as a historical constant steadies the markets in a storm.

Individuals have reasons for romanticising the past while feeling anxious about the future. The collective mind of the market, however, often seems to make more balanced, dispassionate threat assessments and is quick to rally back after any sentiment driven market falls. Nonetheless, we have our eyes on current events and we see plenty of opportunities in the markets today. If you do have any questions, please do not hesitate to be in touch.

As always, I wish you and your family the very best, do have a good weekend.

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