Global Investing

Keeping watch on Israel and Iran

March 1, 2012

With all the euphoria over the ECB’s LTRO operations and a second bail-out for Greece, the possibility of an Israeli attack on Iran is still lurking in the background as a bigger possible shock to the world.

Higher oil prices as sanctions on Iran start to bite and a fall in Israeli equities — one of the few stockmarket losers this year, according to S&P Indices (see blog below this one)  are among the effects so far.

Citi analysts Luis Costa and David Lubin have returned to London from a trip to Israel this week and have soothing words to say on the topic:

In our meetings with political/defence analysts, the feedback we have is not suggestive of an imminent attack against Iran. The argument that oil sanctions imply a “waiting period” before a possible attack has been used many times by locals, and we tend to agree with it.

But they add that investors are likely to be reluctant to go into Israeli assets just now, and recommend selling the country’s currency, the shekel. Instead they advise investors to buy the rouble, the currency of oil exporter Russia.

In fact Israel is doubly vulnerable, both from straight political risk and from the fact that it imports all its oil.

Emad Mostaque of Religare Capital Markets is more nervous about a possible attack in the next few months.

We have now entered the period of peak (Israeli) attack likelihood, which will drop off after March/April into summer…Although I don’t think the fallout (sic) will be that large if Israel attacks (it will be if the US does).

For economist Charles Robertson at Renaissance Capital, a more significant and imminent risk of higher oil prices could come from revolution in Iran, with elections taking place this week. He adds:

The most likely scenario is of course no change in Iran’s political situation and no Israeli strike, and oil prices at $110/barrel  in 2012…However, pressure is intensifying on Iran and the threat of an Israeli strike may be a tool to encourage greater economic sanctions.

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