Overview of Market Reactions
The recent conflict between Israel and Iran has led to a noticeable increase in energy prices. However, the effects on global equity markets have been varied. According to Capital Economics, while the conflict did not cause a significant decline in equity markets as a whole, the impact has been unevenly distributed across different regions and sectors.
Energy Dependency: The modern world economy’s reliance on energy has decreased over time. The energy sector now constitutes less than 4% of the MSCI ACWI Index, which is a reduction to less than a third compared to its 2011 level.
Regional Market Variations
Despite the global nature of the conflict’s impact, differences between emerging markets are apparent. In countries where the energy sector holds a more substantial weight in local equity indices, such as Brazil and Hungary, as well as in net fuel-exporting nations like Colombia and the Gulf states, higher energy prices could provide disproportionate advantages.
Market Performance: Thus far, market performances have been mixed. Colombia, Brazil, and Hungary have emerged as the top performers within the MSCI’s Emerging Markets Index. In contrast, the four Gulf countries, which are geographically closer to the conflict and hence more susceptible to potential disruptions in oil supply and regional instability, have seen a decline and have underperformed compared to the ACWI Index.
Particularly noteworthy is Saudi Arabia’s significant underperformance despite the rise in oil prices, highlighting how geopolitical risks in some regions may overshadow the benefits derived from increased energy revenues.
Future Outlook
Capital Economics cautions that the recent trends observed may not necessarily dictate future developments. The evolving nature of the conflict could potentially reshape market reactions as events continue to unfold.
