Markets seem to discount war-related risk with record rallies

 US stocks surged Friday fueled by optimism over a Lebanon ceasefire and Iran’s (temporary) declaration that the Strait of Hormuz was fully operational. The Nasdaq climbed 1.5%, marking its 13th straight gain and its longest winning streak in decades. The S&P 500 climbed 1.2%, crossing the 7.1k threshold for the very first time.

Closer to home, the DFM also ended the week in the green. Dubai’s main share index climbed around 1% to a six-week high at Friday’s close, driven by gains in real estate and financial stocks. Abu Dhabi’s index was flat.

Asian markets retreated on Friday, failing to follow Wall Street’s momentum. Investor sentiment across the Asia-Pacific region was weighed down by a cautious outlook on the conflict in our neck of the woods. Japan’s Nikkei shed 1.8% on Friday, while South Korea’s Kospi slipped 0.6%.

What’s behind this? It appears that investors are “moving beyond this conflict,” Ameriprise Financial’s chief market strategist Anthony Saglimbene told CNBC. “I think the market has walked back the worst-case scenarios, and it sees a path for the US and Iran to end the conflict and the Strait of Hormuz to remain open. As long as that remains the most likely path, then markets will discount it.”

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Market optimism may prove short-lived, especially considering Tehran’s move to close the contested waterway once again. Ongoing uncertainty masks a harsher reality of fractured supply chains and crippled infrastructure, fueling anxiety among energy producers, logistics providers, and consumers alike, the Washington Post reported over the weekend. “The people closest to the [energy] industry are far more concerned about these disruptions and recognize the length of time it will take for things to return to normal — if they ever do,” oil and gas -cochair at law firm Baker Botts told the outlet.

Even options traders are now racing to position for gains in tech stocks, after earlier sell-offs left them underexposed. Tech stocks, in particular, are currently undervalued, with the premium for the Magnificent Seven narrowing to near eight-year lows in comparison to the broader S&P 500.

A part of this could also be that markets priced in a lot more than what has actually happened earlier in the conflict, CNBC’s Jim Cramer said. The fact that interest rates have not spiked as some had expected has helped reassure investors, he added.

But policymakers believe markets are underestimating the potential fallout of the war — even if it ends soon. When asked if markets need to be more wary, IMF chief Kristalina Georgieva said: “I would argue, yes, because what we see in supply chain disruptions is already quite significant.”

The issue is not just what’s happening right now, but the economic fallout expected after the war concludes, which, according to economists, will be severe. The IMF just last week slashed its global growth forecast by 0.3 percentage points and hiked its inflation forecast by 0.7 percentage points.

THE CLOSING BELL-

The EGX30 rose 1.4% at Thursday’s close on turnover of EGP 12.3 bn (81.3% above the 90-day average). Local investors were the sole net sellers. The index is up 23.0% YTD.

In the green: Orascom Investment Holding (+9.0%), Eastern Company (+4.9%), and Palm Hills Developments (+4.7%).

In the red: Arabian Cement (-1.5%), Raya Holding (-1.1%), and AMOC (-1.1%).