Rumblings of war

04 Sep 2013 
SOURCE: Wong Sui Jau
Markets have been on a downtrend the last two weeks. The STI index has hit a low that is lower than the low it reached during the June correction. The worry now isn’t just limited to the possible pullback of bond purchases by the Federal Reserve. There are now rumblings of war as US and some of its allies consider military action on Syria for the use of weapons of mass destruction.

As a result, markets have been steadily falling while oil prices have also shot up to 120 USD per barrel. This is not new though. If we look at history, US and its allies has been involved in military action in the Persian Gulf before. This includes the first and second Gulf war. Markets have tended to fall each time in the run up to the military action taking place. However, stock markets have tended to rebound shortly after the military action actually starts.

While this does not mean that this time will definitely be the same, there is at least a historical precedent for it. Furthermore, from a military standpoint, there is no question that the US, with or without its allies would be far more superior to what Syria has. However, even for the US, there may be a reluctance to go to the full extent of land based military action. Thus, it is possible that whatever military action does eventually takes place in Syria might be from long distance air based strikes or missiles launched from the US navy.

The current depressed markets reflect the fear of the unknown. While there is history to refer to, there is always the fear that things may spiral into a much broader conflict which would drag other gulf countries into the war. Syria by itself does not produce or import any significant amount of oil to affect global supply. But its surrounding countries do, and Iran, which is a close ally, may intervene. If any conflict spirals out of control and drags other countries beyond Syria into it, the potential impact on global oil supply and oil prices will be much greater.

However, it is still subject to speculation just what exact course of action US and its allies would take. Given its long involvement in Iraq and Afghanistan, it is likely that US at least initially would be reluctant to commit to a land based military action. Similar reservations from other countries have already resulted in the UK parliament voting against UK being involved this time round.

If the ultimate result is relatively limited military action against Syria (only air strikes involved with no land based military action), I believe markets will soon rebound when these become clear. However, if things get worse, and other countries in the gulf get dragged into the conflict, then the case for a short term rebound will not be so clear cut.

In the meantime, I am personally still holding on to my investments and not making any major changes. Leaving aside the rumblings of war in the Persian Gulf, the fundamentals of the US recovery continue to be strong. Valuations of most of the markets are not demanding either at this point, so I am comfortable to hold my investments and ride out the volatility.

As a lot of the uncertainty is based on political decisions being made, volatility in stock markets have increased and these types of gyrations may continue. However, I do believe that the risk of a widespread conflict in the gulf area is not that high at this stage. So, I am going to continue holding on to my investments and invest based on the scenario that I believe will be most likely, and that is that any military action on Syria (if any) will be limited and will not spiral out to involve other Persian Gulf countries.

Message from Admin: The information contained in the above article represents the blogger’s personal views. The information is for general reading and should not be taken as financial advice.

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