Conflict in the Middle-East - should trustees be concerned?
9th January, 2020
As you have no doubt read in the press, President Trump is making headlines again, just for a change, by authorising the assassination of a senior Iranian Military commander. I am not going to express my views on the relative merits of such action but I do want to comment on possible destabilisation in the Middle East. Is this something I should be worried about as trustee of various pension schemes?
I think it is worthwhile looking firstly at how the markets have reacted. In summary, their reaction has been quite muted. The biggest impact has been the increase in the price of oil, a rise of around 5% to almost $70 a barrel. Equity markets have moved down slightly with the US falling from record highs. However, this was quite sector specific with some sectors such as tech remaining relatively steady and other sectors actually rallying. Gold, the typical safe haven asset, rose to a four month high. But on the whole, not much else has changed. So, the markets are telling us that this is nothing to worry about – for the moment.
If you look at the press over the last few days, Trump and Iran seem to have entered into a war of words. At the time of writing Iran had responded with twenty two missiles fired at two US air bases in Iraq. The question is, will they stop there? Iranian television reported this as a first step and there are other factions that could take matters into their own hands. Will there be further retaliation and, if so, what will be the impact on markets, whether in the short or long term? To answer this question, I thought it worthwhile looking at history and three examples in particular.
Lessons from the past
- Firstly, the 1970s oil crisis, caused by problems in the Middle East. This led to high inflation, high interest rates, global economic problems and ultimately in the UK it led to the fall of the Tory government. Could this same type of scenario happen again? I am of the view that this is unlikely. There is now a more diversified approach to meeting global fuel needs including the production of Shale oil in the US and alternative energy sources. Therefore, any supply side shocks to oil and the associated impact should be short-term and fairly limited.
- Secondly, and I am in no way suggesting this would happen again, what if there is a second 9/11? In the days following the horrific events, equity markets fell significantly, but within a month many (including US equity markets) were back at their original levels. This was testament to the strength of global markets.
- Thirdly, Iran has conducted widespread cyberattacks against US businesses in the past, most notably against big US banks in 2012 and 2013. It has been widely reported that Iran could engage in similar behaviours, but the previous attacks had limited impact on the US and, therefore, world markets. In the intervening time, companies have improved their cyber defences. So, unless the Iranian hackers have enhanced technical capabilities, I would not expect such an attack to have long-term impact on markets.
Based on the above I think we could see some short-term market volatility, but in the long run markets should revert back to normality.
What does this mean for me as a trustee?
In the short-term it probably means I should experience some volatility in my scheme’s funding levels. This may present opportunities as e.g. gilt yields spike (and so liabilities fall) and if I am not fully hedged, I might take the opportunity to increase my hedging levels. Schemes with trigger structures will be able to take advantage of such volatility.
In the longer term as markets normalise, I should, all else being equal, experience less volatility in the funding levels of my schemes than the short-term.
So I won’t be panicking, but I will be keeping a close eye on developments in the Middle-East.