Conflict in Israel shouldn’t portfolio changes (for now, at least…)

All eyes are on the conflict between Israel and Palestine. As in all wars at this level, the most important thing is the dramatic loss of innocent lives. Wars also impact economic performance and consequently, the financial markets. For now, according to Alberto Matellán, chief economist at MAPFRE Inversión during an interview on Radio Intereconomía, “the impact, for now, is contained.”

"These events, beyond the human tragedy, represent an increase in volatility that can last from hours to several days, while the market prices in the final scenario. The current scenario is uncertain because some people think that it has all the makings of a large-scale conflict while others don't. And hopefully, it will not turn out like that. If that is the case, the impact would be quite limited. Numerous derivations, such as the price of oil, would need to be looked at, he added, given that wars are inflationary.

As such our expert asserts that, for the time being, the conflict should not condition portfolio changes. "Obviously, we need to be alert. Geopolitical conflicts, wars, attacks or natural disasters – these all generate a specific, one-off problem, in that they are limited over time. It remains to be seen whether the conflict represents a fundamental change in economic performance or not, and only in that case would it drive a change in the portfolio. For the time being, we have no information that points to that," he explains.

Wars are usually inflationary due to two fundamental factors: the greater use of energy and increased public spending. And that pressure on prices comes at a time when central banks are stuck between a rock and hard place, because they have to control inflation without slowing growth.

According to Matellán, there is no reason for either the Federal Reserve or the European Central Bank (ECB) to change the tone of their messaging. As far as the ECB goes, it has even less room to maneuver because “real rates aren’t positive, but close to zero, especially if we calculate them with future inflation in mind.” “To get to a more lax position, we would need to inflation moderating clearly and growth weakening more,” the expert concluded.