When the Headlines Are Loudest, Fundamentals Matter Most

Good Morning Ladies and Gentlemen

“Tesla doesn’t sell more cars than any other automaker. It isn’t more profitable than the competition, either. But investors continue to give it a market capitalisation equal to the combined value of the next 37 largest automakers.”

The Wall Street Journal

Overtaken by Events

Whenever I reflect on the grim reality of the ongoing war with Iran, I increasingly sense that it may highlight a significant failure to accurately assess the situation. To me, the actual events seem misaligned with the perceived threat landscape. I feel that the political leaders involved are merely reshaping reality to fit their own narratives. This entire course of action appears to bear the mark of being “overtaken by events.” The Iranian leadership has demonstrated a notable degree of patience while the U.S. midterm elections draw nearer. It is up to the U.S. President and his government to find a solution. The question is whether he and his administration have the capacity and competence to do so. As Bloomberg quite correctly wrote in Wednesday’s “Businessweek Daily”, “the world doesn’t need more oil worries”.

Strait of Hormuz

Last weekend, the United States paused an ongoing series of strikes against Iran that had lasted nearly two weeks. This suspension coincided with the Islamic Republic’s indication that it would refrain from retaliatory actions and its engagement in discussions with Oman concerning the Strait of Hormuz. The U.S. armed forces appeared to have halted operations the previous Friday without any official explanation, leading to speculation regarding President Donald Trump’s forthcoming decisions. In response to this development, U.S. equity index futures rose, while Brent crude prices fell notably. However, everything shifted this Tuesday and Wednesday again as the attacks resumed.

The Crude Oil Narrative

In the realm of energy prices, the ongoing conflict between the United States and Iran continues to be the primary catalyst for recent fluctuations in crude oil markets. The sharp rise followed by a decline in oil prices exemplifies how geopolitical risks can sway investor sentiment and market expectations, often independently of the fundamental supply-and-demand dynamics. While such events can lead to considerable short-term volatility, history indicates that their long-term effects on the valuation of most asset classes tend to be minimal. As markets gradually assimilate new information, prices typically shift their focus back to fundamental drivers such as economic growth, productivity, corporate earnings, and broader macroeconomic conditions, rather than transient political disruptions.

What About Other Asset Classes?

The effects of geopolitical oil shocks on other asset classes are generally inconsistent and often less enduring than the initial reactions observed in energy markets. Rising oil prices can temporarily place downward pressure on equities by increasing input costs, reducing profit margins, and elevating inflation expectations. Unsurprisingly, energy producers tend to benefit from higher crude prices, which can partially counterbalance broader market weaknesses. In the case of government bonds, they may initially experience pressure as investors factor in the prospect of higher inflation. Yet, during periods of significant geopolitical uncertainty, safe-haven demand can emerge, providing support for sovereign debt markets. Gold typically performs well in such circumstances, drawing strength from its status as a store of value and a hedge against uncertainty. However, this year, this has not been the case so far. Currencies of major oil-exporting nations may appreciate, while those of energy-importing economies may encounter challenges.

Realignment With Fundamental Indicators

Historically and as mentioned above, the effects of geopolitical tensions have often proven to be temporary. Once the immediate risks diminish, asset prices typically realign with fundamental indicators such as economic growth, corporate earnings, monetary policy, and long-term inflation trends. Consequently, while geopolitical tensions can induce notable short-term volatility in financial markets, they rarely alter the long-term trajectory of most asset classes unless they result in a sustained and significant disruption in global, for example, energy supply. It is essential to keep this in mind, especially during a period when the actions of the U.S. government may seem erratic to outside observers.

Conclusion

The recent developments in the Strait of Hormuz serve as a pertinent reminder that markets tend to respond more acutely to uncertainty than to enduring changes in economic fundamentals. Geopolitical events can lead to sharp fluctuations in oil prices and induce short-term volatility across various asset classes. However, historical trends indicate that such effects rarely influence long-term investment outcomes. As headlines vie for investors‘ attention, it is crucial to differentiate between fleeting political noise and lasting fundamental trends. Ultimately, sustainable returns are driven by factors such as productivity, innovation, earnings growth, and effective capital allocation, rather than by temporary market upheavals or geopolitical tensions.

Ladies and Gentlemen

Feel free to send your messages to smk@incrementum.li. Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
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9494 Schaan/Liechtenstein
Mail: smk@incrementum.li