It is 104 years this month since Mark Sykes, a UK diplomat, and François Georges-Picot, his French counterpart, agreed on how to divide the old Ottoman provinces in the Middle East (excluding the Arabian Peninsula) between their respective countries. The Sykes–Picot line was drawn across the region, and thus the contemporary states of Syria and Iraq came into being.
Who controls them now? Last week, Vladimir Putin made a surprise visit to Damascus, where he was pictured meeting with Bashar al-Assad; in Iraq, meanwhile, the assassination of Qassem Sulaimani was carried out under orders from the White House. Sulaimani was Iran’s most powerful general and a major regional figure. While Iran mourned and preached war, its response was careful – a mere 22 rockets aimed at US bases (as opposed to personnel) in Iraq; Iran’s first direct military action against the US in 40 years was in fact designed to cool tempers. That care was perhaps undermined when Iranian anti-aircraft missiles mistakenly shot down a passenger plane, killing 176 people; and the Iranian government initially denied responsibility, only to later backtrack.
For investors, such rapid developments in the Middle East can be hard to interpret, and still harder to relate to economic and corporate fortunes. However, General David Petraeus, former Commander of the US Central Command (which covers the Middle East), and Director of the CIA, is uniquely positioned to comment, and spoke to media last week.
The former general, who is now Chairman of the KKR Global Institute, told US media last week that it is “impossible to overstate” the importance of the US drone strike on Qassem Sulaimani. Petraeus likened the role of the former general to a combination of the Iranian equivalents of the CIA Director, Head of US Central Command (who oversees the US presence in the Middle East), Commander of Joint Special Operations Command and presidential envoy for the Middle East region.
Market participants may lack his expertise, but they were also quick to react to events; investors flocked to gold and government bonds in the wake of the assassination, but there were flows back into risk assets when Iran apparently sought a de-escalation. As for whether these flows were justified by what had transpired, at least some of the answer may lie in Petraeus’ comment that the death of Sulaimani was, in fact, “bigger than Bin Laden.”
Nevertheless, the Iranian attempt to de-escalate immediately raised hopes that calm could be restored, and saw investors take heart by heading back into equities. What changed matters perhaps even more was the downing of a passenger plane – and the fact the Iranian government denied culpability before reversing its story. As things stand, the biggest risk may yet be to the government in Tehran, if the demonstrations of the past few days are anything to go by.
As this rapid chain of events unfolded, investors took the S&P 500, Nasdaq and Dow Jones all to new highs. There were also tailwinds beside the US–Iran de-escalation late in the week, among them continued US–China rapprochement ahead of the 15 January signing of a stage one trade deal, and Beijing announcing some liberalising moves in its financial sector.
Yet there were troubles and tensions too: a new hardline Beijing representative in Hong Kong; disappointing jobs figures in the US; and disappointing Christmas retail numbers for both the US and UK. Kohl’s, the major US department store, reported a 0.2% drop in sales in the last two months of 2018, while JC Penney did even worse, suffering a 7% plunge in sales in the last nine weeks of the year. In the UK, similar troubles were felt at both John Lewis and M&S; and the latest GDP data showed the economy actually contracted in November. Yet the UK equity market is another story – so blighted by political uncertainty that its correlation with commercial realities is exceptionally changeable.
“Since the 2016 EU referendum, the UK equity market has felt like the land that time forgot,” said Richard Colwell of Columbia Threadneedle, manager of the St. James’s Place Strategic Managed fund. “Greater clarity over Brexit and UK politics should not only spur an immediate stock market rally but also encourage a longer-lasting reappraisal of UK-listed companies. UK valuations are at 30-year lows compared with international equities as a whole, touching levels last seen in the early-1990s recession when judged by a range of measures. Similarly, sterling is now back at a 34-year low against the dollar.”
KKR and Columbia Threadneedle are fund managers for St. James’s Place.
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