What Hamas’ attack on Israel means for pension schemes

What happened?

Hamas launched a deadly offensive on Israel, which has led to Israel declaring war and launching counterstrikes on Gaza. While the humanitarian cost is both shocking and devastating, what is the impact likely to be on markets – and therefore, UK pension schemes?

The short term impact

Oil prices surged after Hamas’ attack on Israel (see graph, above). In a note to press, Vincent Mortier, Amundi’s chief investment officer, and Anna Rosenberg, Amundi Research Institute’s head of geopolitics said: “The biggest risk is to oil prices as we think the ongoing relaxation of US sanctions on Iranian oil sales will become harder.

“At the same time, once the immediate conflict will be under control, Israel could decide that now is the time to attack Iran’s nuclear capabilities - with the possibility of a larger regional conflict erupting - and this could lead to higher oil prices.”

The conflict will also benefit defence companies, Amundi noted. However, it will be slightly negative to industries like aviation and long-haul travel, given the complications involved with flying over Israel and into the region.

As Amundi expects the conflict to remain localised, it is not changing its inflation forecasts for next year. However, the conflict does add greater uncertainty to the US’ path towards lower inflation, the asset manager noted.

How could the situation evolve?

There are two paths the war between Hamas and Israel could take, suggested Kristina Hooper, Invesco’s chief global market strategist.

The first is if the situation stays contained. If this happens, investors can take some perspective from the 2014 Gaza war, said Hooper. “That war was very short-lived (it spanned July and August of 2014) and had a temporary negative impact on retail sales that rebounded once the war ended.

“In this scenario, the price of oil is likely to rise modestly, as is often the case when Middle East geopolitical risks rise. I would also anticipate the price of gold to rise somewhat, and for US Treasury yields to fall slightly as investors show a mildly increased preference for ‘safe haven’ asset classes.

“In this environment, based on the stock market performance we saw during and after the Gaza War, I would not anticipate any material negative impact to US stocks or even global stocks beyond the short term.”

If other countries join the conflict, the impact could be much worse and more closely resemble the Yom Kippur war of 1973, said Hooper. “This would be a significant ‘risk off’ environment as Iran’s oil production comes under scrutiny.

“In recent months, Iranian oil production has increased substantially, and the US and other governments have turned a blind eye because it has eased price pressures caused by OPEC+ production cuts. This would likely not continue, which would place more significant upward pressure on oil prices. And if Iran were to become directly involved in the war, it could impact the flow of Gulf exports because of its proximity to the Strait of Hormuz.”

In the latter scenario, gold and UK treasury prices would rise more substantially as investors seek safe havens, predicted Hooper. She added: “In this scenario, I wouldn’t be surprised to see a sell-off in global stocks and even US stocks.”

As long-term investors, pension schemes are generally urged to keep calm and carry on in periods of market volatility.

A key question – which nobody can conclusively answer – is whether the conflict will escalate. This is the point that long-term investors should focus on with their advisers and investment managers.