Three markets to watch if the Israel-Iran conflict escalates

In the last few days the stock markets have done their best to brush off the escalation of the conflict between Iran and Israel and have nudged only slightly lower. But as Israel launched a counter-attack on Iran investors are, rightly, scooting into safe haven assets like gold, the Swiss franc and Japanese yen, and are stocking up on oil.

Is this the best course of action though? We would question one of those assets and suggest a better option.

The effects of US shale

In the past, conflicts in the Middle East would trigger massive buying of oil because they would typically threaten oil supply flow to developed markets. This has somewhat changed over the last two decades as the US overtook all other oil producers, including Saudi Arabia, by building up its shale oil industry into a very nimble and price responsive source of crude. Once prices start rising the US is capable of quickly filling the supply gap and shelter not only the US from supply shocks but the countries it exports to.

While oil is still an option, investors may want to look into other potentially responsive markets such as dividend stocks, in addition to the Swiss franc, Japanese yen and gold.

Dividend stocks

There is a plethora of strong dividend stocks out there but at times when markets are reacting quickly to shifting geopolitics it might be too time consuming to try and work out which ones are best. Instead, it might be worth opting for a dividend stock ETF, particularly with a provider that is quick to react to changes in the dividend universe.

For instance, ETF provider WisdomTree worked fast after Meta Platforms [NASDAQ:META] initiated a dividend payment as part of its full 2023 results. WisdomTree announced a special rebalance in March adding Meta to the eligible indexes WisdomTree U.S. Quality Dividend Growth UCITS Index and WisdomTree Global Developed Quality Dividend Growth Index. The company’s ETFs based on those two indexes would both be a good choice when stock markets are shifting.

• How Artificial Intelligence is fuelling an iPhone moment for automobiles
• USD vs JPY: more volatility in this key FX pair ahead this week
• Hang Seng boosted by equity fund inflows from the Chinese mainland
• Armchair Academy: Introduction to Precious Metals

Swiss franc and Japanese yen

Why the Swiss franc? Unlike some parts of Europe, Switzerland has a strong GDP with a high per capita income, no significant budget deficit and it keeps its unemployment level low. Swiss banks and insurance companies are a massive contributor to the country’s financial services industry and the country’s debt market is relatively small making it very stable.

There are no signs that the Swiss economy will change tack from its low-debt low-growth approach or that it will stop being a banking haven, all of which will continue to work in favour of the Swiss franc.

Looking at the Japanese yen (JPY), it is a very liquid forex market, with low central bank interest rates and a strong trade position all working in favour of the Japanese currency when investors’ risk appetite declines.

Gold

Gold has been gradually nudging higher this spring as markets went back and forth on expectations for US interest rate cuts. In mid-April the gold price hit a high of $2,400 per ounce on worries that the Fed would defer rate cuts until much later this year. Now the rising threat in the Middle East is adding fuel to the fire and we could see new highs reached before the end of the month.

Related ETFs