Syria: the risk of correction

Oil pumpsThe escalation of the civil war in Syria could send Brent oil prices in excess of $125 per barrel, a level that has in the past triggered corrections in equities.

Now in its third year, the civil war in Syria is becoming more complex. The United Nations Security Council remains divided over whether to intervene and how to do it - even as evidence mounts that chemical weapons have been used.

In its latest investment strategy update, Get crashy, Bank of America Merrill Lynch warns investors to watch out for any escalation of the conflict in Syria and other geopolitical tensions.

When the Brent oil price exceeded $125 per barrel in 2008, 2011 and 2012, a correction in equities followed.

At time of writing, Bloomberg reported a Brent oil price of $115.92 per barrel.

“Historically, during oil price spikes, equities have underperformed bonds, which have underperformed cash,” Michael Hartnett, chief investment strategist, says.

Keith Wade, chief economist at Schroders, adds that an intervention now seems likely and the oil price has jumped.

Wade says that in the run up to the first Gulf War between 1990 and 1991, US growth stalled as oil prices spiked and uncertainty caused companies and households to delay investment plans.

"At the risk of sounding complacent, this time should be different,” Wade says. “The first and second Gulf wars were on a much larger scale than the Syrian conflict with the clear intention of sending in troops.”

Wade says that an intervention is likely to be limited to the firing of cruise missiles.

"The recent spike in oil prices is unhelpful as it will add to inflation, acting like a tax on consumers,” Wade says, adding that the current rise is not significant enough to cause a problem for global activity. Like Hartnett, Wade says a Brent oil price of $125 per barrel is the critical mark.

Regardless of the oil price movement, investors have become increasingly worried about geopolitical tensions in the Middle East.

Russ Koesterich, BlackRock’s chief investment strategist, says the region continues to be a major concern. “With the recent collapse of the Egyptian government, and Syria still embroiled in a civil war, there is the potential for more unrest,” he says.

“In addition, political and terrorism risks have already impacted oil production in several countries, including Nigeria, Iran and Iraq.”

©2013 funds europe