There's no doubt investors are worried about the ongoing geopolitical unrest in the Middle East. In particular, market participants are watching very closely what has evolved into a civil war in Libya. So what does it mean for markets?
First is the effect on the oil price. This is positive for oil producers and those exposed to oil (like BHP Billiton) in the short term. It's even good for those invested in Energy ETFs. In the longer term, however, you'll find the impact that higher energy prices have on the consumer (via higher fuel prices and the like) has a negative impact on the economy - and therefore the market. This is especially the case in the United States where consumption demand makes up at least 70 per cent of aggregate demand in the economy.
Second is the effect on confidence or sentiment. Basically markets don't like war. It puts everything on hold and creates uncertainty. The proof is in the pudding. Today we saw money exiting out of mining and banking stocks (what we call cyclical or riskier stocks). Instead, money flowed into companies exposed to safe-haven commodities like Newcrest Mining (gold producer). Admittedly BHP Billiton went ex-dividend today and that caused some selling pressure, but it's clear the rest of the market was also under the pump, so to speak.
I'm not ruling out a positive result from these tensions in the Middle East, it's just important to recognise that the market is responding quite nervously at present because the situation is still particularly volatile and uncertain.
Markets like solid governments that are supported by the people. Markets also appreciate certainty and stability - something we're lacking now - not just coming from the Middle East, but also stemming from the US, China and Europe.
David Taylor
