The situation from the Israel-Hamas conflict remains «highly fluid», according to Bank of Singapore, which warned of tail risks from escalating tensions to the economy, markets and more.
Tensions are high in the Middle East following the latest conflict that began with an attack against Israel led by Hamas on October 7. According to Bank of Singapore, the situation remains «highly fluid» with concerns that the conflict could spread.
«These recent events in the Middle East, amid the Russian-Ukraine war and US-China tensions, have introduced another major geopolitical flashpoint into the global macroeconomic backdrop in the context of a multipolar world,» said a report by OCBC’s private banking arm, which has an office located in Dubai.
The bank highlighted three major areas to monitor: oil prices, the spread of the conflict and asset allocation.
Oil Outlook
On oil, Bank of Singapore noted that an escalation of the conflict could lead to a surge in oil prices, resulting in a stagflationary shock. Nonetheless, this is not the bank’s base case and it retains its previous projections of $100, $90 and $85 per barrel of Brent oil on a three, six and 12-month basis, respectively.
«Neither Israel nor its direct neighbors are large oil producers, and so for now oil market fundamentals have not changed significantly,» the report said.
Conflict Spread
On the spread of the conflict, Bank of Singapore cited media reports about concerns that militias in Lebanon and Syria could get involved in the conflict. It also named Iran as a possible player.
«There is also a tail risk that if Iran is linked to these attacks – directly or indirectly – we might see Israel come into direct conflict with Iran,» it explained. «This could result in a stricter enforcement of US sanctions on oil from Iran, which would tighten global oil supply, or even threaten the Strait of Hormuz through which a fifth of the world’s daily oil supply pass.»
Asset Allocation
Given an uncertain growth outlook and heightened geopolitical risks, Bank of Singapore has been adopting a defensive stance in its asset allocation strategy heading into the final quarter of 2023.
It holds an overall underweight position in global equities, including a neutral weighting in the US and Asia ex-Japan alongside an overweight position for Japan and an underweight position for Europe. Within fixed income, it is overweight US treasuries and investment grade bonds in developed markets. The bank is also positive on the Japanese yen and gold as safe haven assets.
«While the risk of near-term volatility due to the Middle East conflict cannot be ruled out, history shows the impact of these shocks alone are rarely long-lasting. We believe that we are suitably positioned given our current defensive positioning and would not further reduce risk in our asset allocation strategy,» the report added.
