Nine countries in mid-east are at war (with more expected to
join) and escalation is possible, terrorism by extremists is at all time high
and is fast spreading in Asia and North Africa, developed economies are facing threats
of unemployment, poor growth and deflation - but stocks are making new highs!
After six straight years of rising, valuations are not cheap and scenario has enough volatility to destabilize markets.
Major factors indicating headwinds for equities –
- Unrest in Gulf – Yemen was a US base for several years but US could not prevent rebels from toppling the current government. Now Kingdom of Saudi Arabia and its coalition of UAE, Bahrain, Kuwait, Qatar, Jordan, Sudan, Egypt are engaged in war against Yemen. Yemen is strategically important because it is located near Bab al-Mandab strait, a narrow waterway through which much of the world's oil shipments pass. KSA is also keen to protect itself from rising influence of Iran in Yemen. It is seen as a sectarian proxy war between Iran and Saudi Arabia and if it escalates, it will push up oil prices. Iran and other OPEC countries are also unhappy with the recent Saudi policy of declining to cut oil production. Iran is more desperate to see that oil prices rise and a protracted war would be favorable to it, Escalation may further worsen the situation as ISIS may enter to benefit from chaos and Russia may get involved to gain from higher oil prices. It has very strong incentives to see that this war protracts as its economy is in shambles and only rising oil prices can save it. There are rare chances that it will take the other option of agreeing to western demands so that its sanctions are removed. Russia and Iran have already stated that they do not like KSA interfering in Yemen.
- Unrest in North Africa - Libya, Nigeria, and Algeria are under Islamist extremists' terror since several years and in Tunisia, Mali, Somalia, Kenya attacks by extremists are rising, these are places of increasing concern. Growing terrorism will lead to reduction in risk taking capacity of investors.
- US growth is doomed – either by inflation, or by deflation. Whether Fed hikes rates or not its economy will face huge challenges. *
- Eurozone in trouble – sovereign debt, deflation, unemployment, rising inequalities, poor growth *
What will drive future growth in developed countries – low rates,
technological innovation, wars elsewhere, exports to emerging markets, or
something else?
* Details to follow soon
