Ongoing US-Iran tension could boost energy stocks despite lacklustre global outlook

From

Seema Shah

Financial markets’ quick recovery following US-Iran tensions may be short lived and punish investor returns, though a renewal of tensions could increase the appeal of energy stocks.

Principal Global Investors Chief Strategist Seema Shah said: “While geopolitics are difficult to predict at the best of times and both sides have reason to avoid further turmoil, if history tells us anything, enduring peace between the U.S. and Iran is unlikely.”

 “If tensions were to re-intensify, causing a meaningful disruption to oil supplies, the global economic impact would depend on how far, and for how long, oil prices rise.”

US-Iran tensions could hurt household spending, but boost energy

Principal Global Investors forecasts that an increase in oil prices to $US70 per barrel would be digestible, but a further $US10 increase would become problematic as energy would then weigh on global household purchasing power.

Ms Shah warns that, “even considering the fact that, as a net exporter of petroleum, the U.S. is less exposed to oil prices shocks, the repercussions for global markets could be significant.”

Global economy likely to be lacklustre in 2020

Ms Shah said: “We expect the global economy to stabilise in the first quarter of this year, but we don’t anticipate a vibrant upturn. Persistent central bank liquidity should continue to support stocks, in spite of this lacklustre backdrop, but the growing disconnect between expensive valuations and only modest economic growth undoubtedly makes equities vulnerable to a deterioration in sentiment.”

“Investors may want to hedge themselves by increasing exposure to the energy sector. Not only is it more attractively valued than other sectors, but energy would surely outperform in the event of a disruption to oil supply. Energy should deliver in both positive and negative scenarios this year.”

Ms Shah warns investors to maintain some defensive positioning as there remain potential geopolitical risks, including a “shock” outcome in the U.S. presidential elections later this year; renewed U.S.-China tensions; and a repricing of “no-deal” Brexit risk. “Although the economic outlook is more promising than in 2019, thereby making a clear case for increasing exposure to cyclicals, the potential collision of elevated valuations and geopolitical risk remains.”

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