Energy and defense investments are expected to generate returns in the next 12 to 18 months, analysts said.


weeks later Hamas’ devastating attack on Israel – which provoked severe retaliation from Israel that has raised fears of a humanitarian catastrophe in Gaza – the immediate shock that the attack caused on markets appears to be easing.

But given the enormous impact that instability in the Middle East can have on the global economy, a pressing concern arises for investors: what investments would be a safe option given the possibility of escalated conflict in the region?

BCA Research, a global investment strategy firm, is betting on the answer lies in the oil and defense-related investments.

The reason for this, as their research shows, is the war between Israel and Hamas is likely to reach beyond Gaza’s borders and trigger a significant oil shock – a prediction that is looking increasingly likely following reports that the U.S. military has attacked Iran-backed militias in Syria in a self-proclaimed act of self-defense.

BCA Research estimates a 45% chance that the conflict will involve Hezbollah and other militant groups in Lebanon and Syria by mid-October.

In fact, Israeli forces confirmed on Monday morning that they had struck targets in Syria and Lebanon, in what they described as “response to launches from these areas into Israel.”

Matt Gertken, chief geopolitics strategist at BCA Research, said there was even a significant risk that the fighting could expand to include Iran openly in the fight, although that was unlikely overall.

“The United States does not want a full-scale confrontation with Iran. They don’t want to disrupt the flow of oil,” he said. “The Iranians also share an interest with the US. But the probability is still one third. It is still a very high risk for the global economy.”

How oil and defense investments could outperform

With a possible escalation in war looming, there is a high risk of a sharp rise in oil prices over the next 12 to 18 months, according to BCA Research.

The war in Gaza won’t be the only cause, the company says: Russia, still mired in Western sanctions stemming from its continued invasion of Ukraine, is also likely to cut oil production.

“Supply chain restrictions could drive oil prices higher,” said Gertken.

But it’s not just oil that will see the market rise in value – BCA Research has also bet on the defense sector.

The chief strategist noted that the US is increasing defense spending to protect its allies and that Europe is also allocating more resources to defense, which are promising signs of higher profits for investors.

However, Gertken cautioned that defense and energy stocks should be viewed “in relation to other cyclical stocks (stocks whose price is influenced by economic developments, editor’s note).”

As the current global economic outlook shows, including the IMF’s ownsuggests slowing GDP growth next year, so-called cyclical stocks are poised for weaker performance compared to 2023.

“However, within this category, energy and defense stocks are likely to outperform,” Gertken said.

What does the market expect?

As news from Israel and Gaza continues to spread, investors are gravitating toward safe-haven assets like gold and U.S. Treasuries.

Nevertheless, the impact of the war on global financial markets and oil prices has so far been moderate.


The lack of volatile changes in the oil market is the result of two opposing effects.

Osama Rizvi, energy and economic analyst at Primary Vision Network, said that oil prices are on the verge of falling (due to a slowdown in the global economy). This reduced the demand for oil) shortly before the start of the Israeli-Hamasian war.

Many large investors are still considering this prospect: Big hedge funds and asset managers are diverting large amounts of investment away from oil.

The previous week they cut their long-term oil investments in half and cut their contracts to buy oil from about 398 million barrels to about 197 million.

“This was the highest rate seen in the last decade,” Rizvi said.


At the same time, oil prices were also driven up by investors betting on an escalating war in the Middle East – which would subsequently restrict supply and drive prices further higher.

According to Rizvi, there will be no big surprises for the next period. Assuming the war remains confined to its current confines, he expects no more than a $3 to $4 rise in Brent oil prices.

However, if Iran intervenes in the dispute through a proxy war and denies it access to its 700,000 barrels of oil per year, it could see a $10 increase, the analyst said.

The third scenario is the most worrying: an all-out war involving major powers such as the United States, where Israel also stands in direct conflict with Iran.

“If that happens, according to Bloomberg Economics, it has the potential to wipe nearly $1 trillion from global GDP and essentially plunge the global economy into recession, and there is also the possibility that oil prices could reach $150 or more said Rizvi.


How this crisis in the Middle East is different from the others

Looking at previous crises in the Middle East, not everyone is convinced that the situation will actually escalate and fear oil crises.

However, according to Gertken, there is currently a “big difference” in geopolitics that distinguishes the current war from previous ones.

“I think probably the most underrated element of this conflict is that Iran has achieved the capability of a nuclear breakout. So this time it is a different crisis in the Middle East than the previous crises,” he said.

He explained that the underlying question from a strategic perspective is whether the US and Israel are willing to allow Iran to have militant proxies or nuclear weapons that could impact the region.

“To put it simply: Is Iran getting nuclear weapons and Hezbollah, or is it just getting one of those two things?” Gertken said. “And that’s why I think this is an important and dangerous time.”


How the global outlook determines investors’ hands

Even if a potential conflict with Iran is contained, there is still a risk that the U.S. economy will enter a recession in the next 12 to 18 months, according to BCA Research.

The company believes that headline or energy inflation will be too high for the Federal Reserve (or Fed, the U.S. central bank) to begin cutting interest rates.

This, coupled with high energy prices, is depressing demand and putting a strain on the economy, explained Gertken.

One of the main indicators of whether the U.S. is heading into a recession – which Gertken expects to last from 2024 to early 2025 – is the unemployment rate.

“If the U.S. unemployment rate starts rising in the next six months, the first thing it will do is signal to investors that the U.S. is entering a recession,” he said. “And we have a very high level Probability of Europe falling into recession and we have a weak Chinese economy.”


Gertken also pointed out that the moment a possible recession occurs in the United States can have a huge impact on the country’s election results and therefore on global stability. He explained that a recession before the election would reduce the chances of the Democratic Party winning re-election.

“What has the biggest impact on global stability is whether the U.S. political party changes,” Gertken said.

What crisis-proof investments are there?

Rising geopolitical risks tend to drive up the price of gold and the dollar – investors tend to put their money into these assets almost automatically because they tend to withstand global crises.

Gold has long proven to be resistant to geopolitical shocks and has recently remained relatively highly valued despite the rise in real interest rates.

Gertken said one reason is that countries like Russia and China, which are positioning themselves for a trade confrontation with the United States, are stockpiling gold.


“And that provides tailwind,” he said.

Dollar assets could see temporary dips as the currency trades inversely to oil, but fundamentally they are considered a safe haven.

Currencies like the Japanese yen and Swiss franc are also solid choices in a crisis, as are U.S. Treasury yields.

There has been a big sell-off in the bond market recently, but Gertken believes these investments will attract more money flows.

“I think bonds can actually do pretty well because inflation is coming down,” he explained. “I think bonds are still havens, and I think developed market bonds and the U.S. in particular would fall into that category.”


Commodities could also provide good returns for investors over the next 12 months. Silver and copper are potentially good investments, says Rizvi, adding that these two generally see increasing demand and rising prices when economies are doing well.

“Given the state of the global economy, a bearish position in copper can lead to good future returns,” he said. “Because all of this (the current limited economic growth, editor’s note) has to be reduced sometime in 2024 or 2025 when the Fed begins to abolish its monetary policy.”

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