Iraq-Iran threat to investors in the long-terIraq-Iran threat to investors in the long-term
Saturday, February 25, 2006 - ©2005 IranMania.com
LONDON, February 25 (IranMania) - Political tensions are rising in Iran and Iraq but they are more likely to pose long-term risks to global investment than trigger substantial short-term jitters, Reuters reported.
With one exception, financial markets have been generally oblivious to sectarian violence in Iraq, exacerbated this week by the bombing of a major Shia shrine, and the West?s escalating dispute with Iran over its nuclear programme.
?At the moment, investors don?t seem to be too distracted,? said Haydn Davies, chief economist at Barclays Global Investors.
The exception, however, is oil, which at more than $60 a barrel is around twice the price it was five years ago and is a constant concern to investment strategists fearing its impact on economies and assets.
To be sure, the rise in oil over the past few years is not primarily because of troubles in oil-producers Iran and Iraq or the wider Middle East as a whole.
It is, rather, laid at the door of soaring demand from China, India and other booming emerging market economies a generally healthy stimulus for the price from a global investment standpoint.
But the price does include a risk premium for geopolitical tension, including terrorism and Middle East turmoil. A $1.50 a barrel rise earlier this week, for example, was a reaction to rising violence in oil-producer Nigeria.
Rising or spreading violence and/or political tension in Iran and Iraq could shift the balance between a healthy price stimulus and an unhealthy one. ?If a risk premium is pushing up oil prices, that is pretty bad news,? Barclays? Davies said.
Macro and micro: Geopolitical risks do have an impact on financial markets. Chris Dialynas, a senior strategist with US bond firm PIMCO argues, for example, that a lack of global investment in plant and equipment in some areas can be traced to worries about risk.
That keeps bond yields low, he says, by steering the money into fixed income investments such as US Treasuries. The concern about Iran and Iraq generally focuses on their potential impact on oil prices and, in turn, the impact of higher prices on global economies and assets.
?In terms of any macroeconomic shock, it is all going to come through the oil price,? said Michael Metcalfe, head of global macro strategy at State Street Global Markets.
High oil prices act as a tax on consumers and business, dampening both profits and demand and muffling economic growth. Equities would suffer most if that took off, whether as a distant result of Iran and Iraq tension or something else.
At the same time, although many investors dismiss the danger, central banks have been quick to warn of inflationary pressures from rising oil prices, Reuters added.
Any resulting rise in global interest rates beyond what is already expected would hit both stock and bond investors. Some strategists, however, argue that a lot of this risk is already priced into assets and is dealt with in turn by markets as it arises.
?The wall of worry has continually been climbed by investors,? said Richard Batty, an investment director at Standard Life Investments.