Global market risk premium to rise if Israel-Hamas war escalates, says research house

Global stock, bond and commodity markets have already reacted forcefully over the weekend

THE global market risk premium, Malaysia included, will rise should the war between Israel and Hamas escalate.

“There is a risk that the war may escalate and evolve into a full-scale proxy war between the West led by the US and Iran. As such, inevitably, the global market risk premium, Malaysia included, will rise,” according to a Kenanga Research report released earlier today.

The death toll on both sides following Hamas’ strikes against Israel over the weekend topped 1,100 as fighting headed into a third day, while the US said it was sending warships to the region, reported Bloomberg.

Kenanga Research said global stock, bond and commodity markets have already reacted forcefully to the attack on Israel by the Palestinian militant group Hamas over the weekend.

The local research house said assuming it cuts its target price-earnings ratio (PER) for FBM KLCI by 0.5 times to 16 times (from 16.5 times it currently applies), its end-FBM KLCI target will fall to 1,470 points, from 1,520 points currently. It said if it were to cut its target PER by a full multiple, its end-FBM KLCI target would fall to 1,425 points.

“For now, we are keeping our FBM KLCI earnings forecasts (CY23F: -4% and CY24F: +10.5%) and end-CY23 FBM KLCI target of 1,520 points as the war is still a developing situation. We are also keeping our sector and stock picks, which happen to be more defensive in nature,” it said.

While Israel and Palestine are not key producers of oil and other key commodities, it noted that they are basically at the doorstep of the Middle East, which is a major oil producing region in the world.

“An escalation of the war could potentially eventually disrupt the production or transportation of oil out of the region. In any case, the perception of a heightened geo-political tension itself is sufficient to keep oil prices high, adding inflationary pressure to the global economy,” it said.

Oil surged as much as 5% after the broadest and bloodiest attack on Israel in decades threatened to inflame tensions in the Middle East, the source of around a third of the world’s crude, reported Bloomberg.

West Texas Intermediate traded near US$86 (RM406.98) a barrel as a war-risk premium returned to markets.

The latest events in Israel don’t pose an immediate threat to oil flows, but there’s a risk the conflict could spiral into a more devastating proxy war, embroiling the US and Iran, according to the report.

Any retaliation against Tehran amid reports it was involved in the attacks could endanger the passage of vessels through the Strait of Hormuz, a vital conduit that Iran has previously threatened to close.

“While the worst-case scenario of a regional war has to be kept in view, it’s not my base case,” Vandana Hari, founder of Singapore-based analysis firm Vanda Insights told Bloomberg. “Restraint and calmer minds will prevail as there will be only losers all-round in a wider war.”

Oil jumped on fears the worst attack on Israel in decades could roil the wider Middle East, home to almost a third of global supply. Israel has pointed the finger at Iran but Western officials have been reluctant to publicly say Tehran was directly involved. — TMR / pic AFP