Wealth managers have much to think about regarding the grim scenes from Israel.

In the rapidly unfolding events in Israel, which is grappling with the Hamas invasion on Israel’s southern border at the Gaza strip, focus has rightly been on the scale of the violence, the loss of life and the kidnapping of Israeli citizens and others as hostages. In terms of geopolitics, there is widespread commentary that Iran is a prime supporter and funder of Hamas and Hezbollah, and this is likely to raise questions about how or what the Biden administration, and others, will do about that. 

Beyond the immediate human toll there are clear implications for the regional and global economy. Already this morning in Europe, Brent crude oil is up around 3.59 per cent, at $87.62 per barrel. West Texas Intermediate is up about 3.74 per cent at $85.89 per barrel. Shares of firms exposed to defense, such as Lockheed-Martin and Raytheon, are up. 

Regarding the point about Iran, this situation will underscore how money laundering for terrorist groups must carry heavy penalties. The private banking sector has, as we saw with Russian accounts, had to act rapidly to ensure that there are no gaps in AML systems. The invasion of Israel is going to ratchet this process up even further. The war will also put Israel’s recent Abraham Accord diplomatic connection with the United Arab Emirates under the spotlight – a reminder of how Israel’s rapprochement with Gulf states may have triggered Iran and its proxies to act.

Security in the region will be stepped up. Travelers to and from the Middle East will need to be extra vigilant.

As far as the market and financial impact is concerned, much depends on how long the conflict lasts, and what other countries/organizations are drawn into it. 

“The Hamas invasion of southern Israel over the weekend is an eruption of an ongoing regional conflict and humanitarian crisis which has the potential to expand into a prolonged conflict that historically has been a headwind for global equity markets,” Norman Villamin, group chief strategist, at Union Bancaire Privée, said in a note.

“A look back at the impact of such geopolitical conflicts on the S&P 500 going back to 1940 – ranging from coups/assassinations, to terrorist events, and including cross-border wars between nation-states – in aggregate suggests modest upfront impact of such events which dissipate quickly…However, the type and duration of the event are significant in understanding the potential impact upon markets,” he said. 

Villamin continued: “Thus, the risk that the largest incursion into Israel since 1973 transforms from a localized event to one that is prolonged and engulfs a wider range of nations should be among the key concerns for investors. Indeed, a prolonged conflict has the potential to draw in Iran and imperil the potential normalization of Saudi-Israeli ties that are reported to be close to being announced.

“With Iranian exports and US releases from its strategic petroleum reserve having virtually fully offset Saudi supply cuts since September, a global response which reduces Iranian supply where Saudi Arabia does not compensate with increased production would create a renewed supply shock for global energy markets,” he added.

Other figures in wealth management agreed that a long-drawn conflict will be damaging to the wider economy.

"The main risk is the situation worsening in the region and a potential conflagration between Israel and Iran. That would have very serious consequences. Not only is Iran a big oil producer but it could once again block the Strait of Hormuz and destroy neighbouring oil fields. The reaction of Hezbollah, the Iran-backed militia in Lebanon, over the weekend, remained symbolic without significant military action," Benjamin Melman, Global CIO Asset Management, at Edmond de Rothschild, said.

"Israel’s prime minister said the war would be long and difficult. Nobody can say for the moment if the riposte will be similar to those seen in the past or if the sheer shock of what happened could lead to the conflict spreading. The fact that the Israeli government has been weakened by their constitutional reforms, that large sections of the population have rejected, could make its reaction less predictable," Melman continued. "As a result, it is only logical to apply a risk premium to markets. For the moment there is no reason to change our asset allocation stance. We will wait to see how the situation plays before taking a position."

In a note from Susannah Streeter, head of money and markets, Hargreaves Lansdown, the UK wealth manager, she said: “The S&P 500 is expected to start the week in a downbeat mood, given the shocking eruption of conflict in Israel. The latest inflation snapshot, due out this week, is set to keep investors on edge. Although price rises are expected to have slowed again in September, any hint of stubbornness creeping back into the picture could lead to another bout of selling. Bond markets are closed for Columbus Day, so it’s unclear yet what impact events in Israel will have on Treasury yields, although concerns about fresh inflationary pressures from higher oil prices, may limit a move lower despite a search for safety by other investors.”