The short answer is yes, but to what extent depends on your nationality, your job or business, and to what extent you travel. It can also affect your savings and investments.
Conflicts have been ongoing in the Middle East for thousands of years so why should the latest crisis be any different? The reason is the ferocious call for revenge by seemingly the entire population of Iran against an American government whose president ordered the assassination of a highly respected general. Respected that is, by Iranians, but not the West.
How did it start and where is it going?
A few days ago the US launched a drone attack in neighbouring Iraq that killed Iran’s second most powerful figure, Qasem Soleimani. Its justification was that Soleimani was planning imminent attacks on US personnel in the region, although to date it has not produced any evidence to that effect. There seems to be a general consensus in the West that Soleimani was an evil figure but there has been little support for the manner in which he was assassinated without wider consultation within the US government or with allies for whom Trump widely shows contempt.
The action brought together a previously divided Iran as in one voice the people have been demanding revenge and it has been duly promised by its leaders. In turn, should there be any retaliation, President Trump has threatened to unleash attacks on 52 targets, including cultural ones, which has further enflamed Iranian anger.
Some form of retaliation on the part of Iran seems inevitable, given the anger and determination shown by its people. Depending on the scale of the retaliation it seems equally inevitable that the US will respond even more aggressively. This could happen before this issue of the Bali Advertiser is published or more likely in the following days or even weeks.
What was the immediate impact?
The price of oil immediately shot up as did the price of gold which reached a 7-year high on 6th January. Stock markets fell, but not significantly.
US citizens have been warned to leave Iraq and be extra vigilant elsewhere. A word of caution to other western nationals: In 1972 a former boss of mine in the oil industry, Sam Burbidge, moved to Lebanon. A few weeks later I heard on the radio that he had been shot dead in his car. Apparently he had been taken for an American; they were targets even then. In fact he was British.
If the US chooses to attack Iran it can do so with ease from its bases and ships in the vicinity. Iran has limited capacity or the means to attack the US directly so it has to seek US targets in other parts of the world, including ‘soft’ targets such as oil tankers.
What about longer term risks?
Much depends on the scale of retaliation and counter-retaliation. Best case scenario would be a de-escalation of hostilities following a couple of inevitable skirmishes. Worst case scenario would be a full-scale war spreading to other countries in the Middle East. The probability will be something in between.
If shipping is disrupted for more than a few days the price of oil could go through the roof. This will hurt Indonesia badly because it now depends heavily on imported oil. Chances are that the government will continue to shy away from increasing the price of petrol and instead will have to increase the current subsidy to the detriment of other sectors such as infrastructure. The Rupiah could also suffer as a result.
An all-out war would seriously impact the tourist industry as people do not like to travel far during times of conflict. Europeans in particular will be reluctant to transit or fly over the Middle East or pay higher fares to airlines that by-pass the region. Those working in the tourist industry would do well to have a few contingency plans in place.
How might currencies and gold be affected?
Where currencies are concerned the ‘safe havens’ tend to be the USD, Yen and Swiss Franc. Emerging market currencies will be out of favour. Cash in the bank is not always the safest investment in the event of extreme financial disruption. Holding real assets, such as property or shares, can be safer in such circumstances if rampant inflation results from conflict.
People also flock to gold in times of conflict and war, hence the current 7-year high. It is wise to hold some gold as an ‘insurance’ against disruption or collapse of the financial system or currencies. Buying gold, however, is also speculative since it does not pay interest and can take a long time to recover from a big fall. If you see its price rising exponentially it is almost certainly too late to buy. That’s when panic buyers move in. Buying physical gold directly has its own risks. The simplest way to buy is via a mutual fund but you can expect charges that reflect the cost of storage and security. You can also buy gold indirectly via gold mining funds.
What about stock market investments?
These are likely to go through a period of volatility but they can also recover quickly so the conventional wisdom for long-term investors is to ‘stay the course’. There could be room however for some short-term adjustments to reduce volatility. If you have or plan to start a portfolio of investments these are some of the funds or asset classes that can be considered ‘defensive’ or more robust during troubled times:
• Money funds – safer than cash as they hold a range of deposits across a large number of banks. Not only can they negotiate higher rates of interest but they are better protected should any single bank fail.
• Government bonds – the safest of all investments in theory as a government can always print money to honour the capital and interest payments although in that event purchasing power would be another matter!
US Treasuries currently pay between 1.5% and just over 2% per annum depending on duration.
• Corporate bonds – safer than shares since in the case of insolvency, bond holders get paid before shareholders.
• Equity income funds – these comprise shares that pay good dividends, a useful source of income should share prices fall.
• Infrastructure funds – projects tend to continue even during times of recession or stress.
• Actively managed mixed asset balanced funds – let the professional managers make the calls when deciding asset allocations and changes.
The above should in fact be part of any large diverse portfolio. But the proportions can be adjusted to circumstances and this could be one of those times when such adjustments should be made, particularly following 2019 which proved a very good year for most major markets.
Conclusion
Bali is a universe away from the turbulence of the Middle East. Most Balinese outside the tourist industry are unlikely to be affected but expats will relate more closely to unfolding events and some will be affected more than others. Americans in particular will feel impacted by the folly or wisdom of their leaders depending on how they view the actions that led to the present scenario. Time will tell whether it was good or bad judgement. But for most it is important to stay safe and take whatever actions may be appropriate to weather any potential economic fallout.
Colin Bloodworth, Chartered Member of the Chartered Institute for Securities and Investment (UK), has spent over 20 years in Indonesia. He is based in Jakarta but visits Bali regularly.
If you have any questions on this article or related topics you can contact at : colin.bloodworth@ppi-advisory.com or +62 21 2598 5087.
You can read all past articles of Money Matters at www.BaliAdvertiser.biz
Copyright © 2020 Colin Bloodworth