Erste Asset Management Investment Blog

Attack on Israel

Attack on Israel
Attack on Israel
(c) CHARLY TRIBALLEAU / AFP / picturedesk.com
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The smouldering conflagration in the Middle East reached a new level of escalation last weekend. Iran attacked Israel directly with drones and missiles for the first time in history. There is a risk of further escalation between Iran and Israel. However, there are indications that the situation will remain in a balance, albeit a fragile one, at least in the short term. Iran had announced the attack so that Israel and its allies could prepare for it. In fact, the damage caused was minimal, even if the defense cost a lot of money. Moreover, political analysts argue that both Israel and Iran can now present themselves as winners. Israel successfully repelled the attack. Iran has dared to attack Israel directly, thereby demonstrating its strength. In addition, Iran has announced that the retaliatory measure is the end of the matter.

Stock markets hardly changed

To date, no typical significant market reactions to increasing geopolitical uncertainty have been observed. The prices of credit-safe bonds such as US government bonds and German government bonds have not risen, the US dollar has not strengthened and share prices have not fallen. The price of oil has not risen either.

Market expects the conflict to remain regionally limited

The market is therefore pricing in the fact that the conflict in the Middle East will remain limited and will not have a global impact.

We share this view and are leaving our asset allocation unchanged. A classification along the axes of economic growth and inflation helps in the search for a correct assessment of the economic scenario. The (more broadly based) global economic growth at potential and inflation above the central bank target provide an indication of the “inflationary growth” phase. In line with this, we continue to classify equities, corporate bonds with a low credit rating (high-yield bonds) and emerging market bonds as attractive for our tactical asset allocation. In relative terms, the attractiveness of bonds (government and corporate bonds) is low. On the positive side are the favorable economic development, satisfactory corporate profits and the high demand for yield. However, indicators suggesting a short-term overbought market situation and valuations that are slightly above historical averages call for caution. Inflation could continue to surprise to the upside, central banks could indicate a more restrictive stance, corporate earnings could disappoint and the geopolitical situation could intensify. For this reason, equities remain neutrally weighted.

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RESPOND TO THE ARTICLE

Gerhard Winzer has worked at Erste Asset Management since March 2008. Up until March 2009, he was Senior Fund Manager in Fixed Income Asset Allocation; he has been Head Economist since April 2009.

He holds a degree from a polytechnical college and studied economics and business at Vienna University with a special focus on financial markets. He holds a CFA charter and participated from 2001 to 2003 in the doctoral programme for finance at the Center for Central European Financial Markets in Vienna.

From July 1997 to June 2007, he worked in research at CAIB, Bank Austria Creditanstalt, and UniCredit Markets & Investment Banking. His last position was as Executive Director for Fixed Income / FX Research and Strategy. He was responsible for research on asset allocation at Raiffeisen Zentralbank (RZB) in Vienna from July 2007 to February 2008.

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