23 Oct After Hamas attacks, are there investment opportunities abroad?

Q. With all the military actions expected in Israel, are there investments that would take advantage of the situation?
— Investor

A. We wish peace for all those who are impacted by the recent attacks on Israel and the ongoing conflict.

Let’s try to look at this with an unemotional eye.

Geopolitical events such as this tend to cause short-term volatility, broadly putting pressure on risk assets as the uncertainty over the duration and potential impacts of the conflict weighs on markets, said Charles Pawlik, a certified financial planner and chartered financial analyst with Beacon Trust in Morristown.

While the underlying supply/demand dynamic for oil has not been meaningfully affected as of yet, conflicts in the Middle East tend to lead to an increase in oil prices in the short-term, he said.

“Along with impacts on the peace talks between Saudi Arabia and Israel and any potential increases in oil output as a result, questions as to whether or not Iran is implicated in the conflict as well as potential impacts on transit through the Strait of Hormuz if wider conflict breaks out, have the potential to put continued upward pressure on oil prices,” he said.

The stocks of oil companies have benefited recently as WTI (West Texas Intermediate) crude oil prices, which serve as one of the main global oil benchmarks, have moved up roughly 6% since the attack as of the time of this writing, Pawlik said.

As is also typically the case when conflict breaks out, the stocks of major defense contractors traded up sharply in the wake of the attack, he said.

Gold, which is perceived as a safe haven asset and is generally expected to serve as a ballast when equity volatility breaks out, has also traded in firmly positive territory, with gold prices up over 7% since the attack as of the time of this writing, he said.

With all of this said, geopolitical events such as this cannot be predicted, and Pawlik does not suggest being reactionary in the face of them.

“Although the uncertainty around the impacts of these types of events drives volatility in equity markets in the short-term, the preponderance of historical evidence relative to what has occurred in markets subsequent to major geopolitical events does not suggest that it is productive for investors to attempt to time the market around these events, nor do we believe it is prudent to chase price spikes in investments that may be expected to benefit in the short-term,” he said.

Although there is the potential for meaningful volatility in the short-term, the average total drawdown in the S&P 500 subsequent to major geopolitical events going all the way back to the attack on Pearl Harbor in December of 1941 was 5% to 6%, with the market taking about two weeks to bottom and just over a month to recover on average, he said.

Similarly, the S&P 500 dropped 6% to 7% in the days and weeks subsequent to Russia invading Ukraine on Feb. 24, 2022, he said. However, a month later the S&P 500 had recovered and was trading at a higher level than prior to the invasion.

“These types of events as well as the backdrop of on-going uncertainty on many fronts, reaffirm the importance of remaining invested in a diversified portfolio that has exposure to many different types of assets and opportunity sets with a long-term focus, as well as working to consistently ensure that sufficient liquidity is maintained so that risk assets do not need to be sold at the wrong time,” Pawlik said.

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This story was originally published on Oct. 23, 2023.

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