Fighting has intensified on Syria’s borders with both Turkey and Israel. In each case, Syria would be making a huge mistake dragging its militarily stronger neighbors into a conflict. Poorly organized and supplied rebel forces have made significant strides against the Assad government and refugees include high ranking military officers who are adding expertise, and hopefully discipline, to the rebel forces. Assad does not seem prepared to back down or leave gracefully. More to the point considering our concern for the effect of a broader Middle East war on stocks is that Assad has specified that he would not use his stock of poison gas unless the conflict involves foreign nations. However, if either Turkey or Israel is pulled into the widening Syrian conflict the results could be far reaching. For an individual involved in stock investing at this time it may be wise to consider the effect of a broader Middle East war on stocks across the globe.
Iran, the Persian Gulf, Oil
The fundamental analysis for this is basic. A fifth of the world’s oil passes though the choke point of the Straits of Hormuz on its way out of the Persian Gulf. A widened conflict in the Middle East would certainly drive the cost of oil higher. The closure of the Straits of Hormuz during war time could drastically raise the cost of crude oil and drive the already shaky economies of Europe into a recession. The effect of a broader Middle East conflict on stocks in this case would send oil stock higher, crude oil futures higher, and damage a wide range of stocks in markets across the globe.
Worst Case Scenarios
Iran has a mutual security pact with Syria. Iran is developing the capacity to make nuclear weapons. The West has put severe economic sanctions on Iran in an attempt to halt their nuclear ambitions. Iranian leaders have numerous times spoken of their wish to eradicate Israel. Israel is the only nation in the Middle East though to have nuclear weapons. If Iran can claim that Israel is attacking Syria would it use this as an excuse for a preemptive strike against Israel? Would Israel use the presence of Iranian nationals in Syria as an excuse for a preemptive attack on Iranian nuclear installations? Virtually any worst case scenario drags the USA into the picture, damages oil facilities throughout the region, and, perhaps, rearranges the map politically if not by boarders in the Middle East. The prospect of a Greek financial collapse would pale in comparison to a worst case war in the Middle East. The effect of a broader Middle East war on defense stocks in the USA could be significant. In fact, there are contrarians who claim that the West is seeking a broader conflict in the Middle East in order to cure the malaise in their economies and broaden their influence to resemble colonial times.
Profiting from Worst Case Scenarios
There are three schools of thought regarding the effect of a broader Middle East war on stocks. Let us assume that the fighting in contained and that cooler heads prevail. The price of oil will rise and the expected European recession might happen. Oil stocks will prosper as well as all energy stocks. Defense stocks may do a bit better. Then let us assume that a broader war breaks out. Oil prices will go through the roof. Economies will falter across the globe with excessive energy prices. Defense stocks will soar. A third line of thinking is that things could get really bad. Stock markets could fall across the globe, the “blood in the streets” scenario. At that time investors who remember the words of Baron Rothschild will take advantage of the effect of a broader Middle East war to pick up bargains as they profit from a global stock selloff.