FYI | Jun 18 2014
By Peter Switzer, Switzer Super Report
It is so hard to work out how geopolitical risks are going to hit or hurt the stock market and the very thought of a Middle East war takes me back to one of my first TV commentary spots for Nine’s A Current Affair.
It happened when the US started its military campaign to drive Saddam Hussein out of Kuwait in January 1991 after Iraq annexed the country in August the year before.
Reporter Jane Hansen asked both Rene Rivkin and a much greener Peter Switzer about the economic and market effects, especially about the oil price implications, which I tackled with some confidence but then she threw me, but not Renee, when she asked: “Who’s going to win and how long should it take?”
I said I didn’t know as this was not my expertise but Rivkin took the punt and tipped a quick US victory and big positive market reaction. He got the geopolitical and even the market tip right, with the Dow Jones index up over 300 points in the three months to the end of March 1991.
Cause and effect
I know that there is no real rhyme or reason about geopolitical threats and market behaviour. In fact, I have often used a political problem that temporarily hits a stock market as a buying opportunity because, unless the event is materially going to change the key drivers of a share price for a company, such as the price of oil for an airline, then you can assume that it does not pay to be spooked by something such as problems in Iraq, Egypt and the Ukraine.
In 2011, a luminary in the world of business made some big predictions. His name is irrelevant, but what he predicted and got wrong isn’t.
Looking at 2012 he identified 10 big threats to stocks and he did it at the end of 2011. His big four, in ascending order of importance were:
4. China is still at risk of an economic hard landing! (Yep, even then they were tipping this.)
3. The Middle East and North Africa – the 'Arab Spring' — could disrupt oil production!
2. The United States' failure to extend jobless benefits and payroll tax holiday would hurt GDP. It was also at risk of another credit downgrade!
1. Eurozone could face a euro break-up if Germany and the ECB don't step up!
All four did not happen as forewarned and even the Arab Spring did not hurt oil supplies and by mid-2012 the stock market took off for a huge share price surge.
The full story
The warnings about the Eurozone could have chased Nervous Nellie investors well away from European stocks but they have boomed since 2012!
This is why I am sanguine about news stories that can be important in terms of politics and human loss of life but could have limited impact on how our investments will perform.
I noted on Saturday that our friends in the USA were able to finish in positive territory, despite the bad news out of Iraq. Of course both the Dow and S&P 500 were down for the week and you’d have to cite the Iraq effect for that.
Right now, stock markets are weighing up the tightening that lies ahead in monetary policy in the USA and the UK, where the Poms’ economy is coming good. This is probably a bigger market issue, which I will monitor for you in coming weeks.
And to put Iraq into oil context, it only produces three million barrels of the 90 millions produced per day. The US now pumps out eight and a half to nine million barrels a day and this number grew by a million this year and is tipped to go up by another million next year!
This has come about via the shale oil boom in the USA and it’s now the number three producer in the world, behind Saudi Arabia on 11 million barrels and Russia on 10 million.
One clown who should know better argued that oil could go to US$200 a barrel without Iraq but that shows you how urgers and short-selling smarties use these times to spook investors.
Sure, if the war hots up, stocks could slide and it could provide impetus for that overdue correction, but I will be piling into the stocks I like, which look a tad over-valued until we see some better company earnings and a lower dollar.
And don’t forget US markets sold off pretty heavily when Ukraine problems emerged earlier this year but since then their key indexes have hit all-time highs!
When I was put on the spot by Jane Hansen back in 1991 I stuck to what I knew and argued that the market would go down on the fear of the unknown but would bounce back if Renee was right with his geopolitical guess and yep it did rebound – just another a buying opportunity.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
