Growth vs. Middle East Conflict: Will It Hold? | Monthly Investment Insights

Get the latest market perspective from Chief Market Strategist Guy Miller in his new Key Investment Insights video.

This month's key points:
- Global growth to withstand Mid East conflict
- Financial markets vulnerable to a setback
- US Supreme Court shows institutional integrity

Transcript

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Guy Miller, Chief Market Strategist & Economist, Zurich Insurance Group: 0:00

We think global growth will be able to weather this impact from higher prices as[Music ends] a result of the conflict in the Middle East. Welcome to Key Points for March. This month we look at the impact from the conflict in the Middle East on the global economy and ask could this derail the growth dynamic. We also turn our attention to the financial markets and ask the same question. Is the bull market and equities under threat from what we see there. And finally we look at the Supreme Court ruling in the United States, which has ruled against some of the President's tariffs. What could this mean for tariffs ahead? Now turning to our first point. The conflict in the Middle East of course has been escalating in recent days and having a profound impact in terms of the region. The key thing from an economic perspective of course is how does that affect the energy price? How could this be impacting inflation? And from that perspective it's still too early to tell the full impact but if you look at the chart I'm showing you here, you can see the red line here is looking at natural gas prices in Europe, which has spiked. And the blue line, of course, is the Brent Crude Oil price. You can see both of these have moved up appreciably in the last number of days. Now what is interesting here, yes, they have moved up sharply, but if you look at the level we have, for example with Brent around $80, that is actually still very low by historic standards. So, this is unlikely in itself to have a big impact in terms of economic activity. Yes, there is some risk that the inflation dynamic will be a bit of a headwind, but we're not expecting this to fundamentally derail a very good global growth story. You remember global growth is trend-like. We've got fiscal stimulus coming from China, from Japan, from the U.S. and Germany over the course of this year. We've get some further policy rate cuts coming through as well and that in combination with a industrial production cap spending cycle, we think global growth will be able to weather this impact from higher prices as a result of the conflict in the Middle East. So net-net, yes there is a headwind developing but we're not expecting global growth to be derailed. Now turning to our second point around the financial markets. As many of you know we've been long believers in the bull market for equities but it's fair to say what we're seeing in the Middle East is going to have an impact in terms of equity market sentiment. And it risks actually undermining some of that strength we've been seeing. If you look at the chart I'm showing you here, it's looking at the global equity markets really since the back end of last year. And you can see that they've generally moved higher. There has been a fan developing where some markets have been moving much more strongly than others. But broadly speaking, there has been a desire on the part of investors to move into equities. And of course that's resulted in these very good returns. Now that noted why we think the fundamentals for equity markets are still strong. We're seeing again a good macro backdrop. Corporate earnings are really strong. I can point to Nvidia just last week that had 73% revenue growth on a year-on-year basis and a gross margin of 75%. This shows you there's still a strong fundamental backdrop to the global corporate sector and the global equity markets in particular. Now that noted, we keep pointing out that even in bull markets, equities can fall between 5 and 10% and frankly, it's been some time since we've seen that kind of move. Really it was Liberation Day last year that we last saw a significant move in equities. So given the uncertainty that this conflict is creating, and remember this is different to last summer where the U.S. was clear in its intent in terms of what it was doing in Iran. This time it's more open-ended, it's less clear. And that lack of clarity is never a good thing for investors. Consequently, we think there's going to be more volatility, we are expecting some further pullback in equities, and we do think actually this is time for some caution required. Ultimately we think the fundamentals remain in place, but now some caution is a good thing in terms of the financial markets we believe. So turning to our third point. The U.S. Supreme Court has ruled against some of President Trump's tariffs. This is a move that we think is really quite profound and of course has been lost given the news flow coming from the Middle East. So by ruling against the sitting president's, or at least some of the sitting president's tariffs, this shows that the Supreme Court still retains that institutional integrity and robustness focusing on the law rather than the comments coming from a sitting president. And again that is really important in the long-term investability of the United States. So, of course, the President was quick to add new tariffs. Given that some of them had been ruled against. But if you look at the chart I'm showing you here, this is the effective tariff rate that we've seen in terms of the revenues generated from these tariffs. Now, unlike the 9th tariff rate, which was around about 16%, you can see this has been coming down. It's already below 10%. The President has removed some of the tariffs, given the cost of living challenges that U.S. households face but this ruling by the Supreme Court is likely to lead to tariffs coming down a bit further yet and again that's something that we think is quite important but this is not the real key message here. Yes it's good that tariffs are being lowered but the message to us is the U.S. is still open for business, it's still very much investable and the U.S. institutions are remaining their independence and rigor and that's an important message for all of us.[Music starts] Now remember as always you can read the full report on zurich.com and I look forward to speaking to you again very soon.[Music ends]