Oil: Geopolitics, growth risks and rotation – HSBC

HSBC Asset Management discusses how recent geopolitical tensions have driven Oil higher and raised market volatility. The report outlines two main scenarios: a transitory Oil price shock that preserves the current growth and profit outlook, and a persistent spike above USD100 that could hurt growth, profits and equity valuations, especially in markets already priced for perfection.

Oil shock scenarios and market impact

"In terms of oil price shocks, the size, speed, and persistence of the price move will determine the implications for the growth-inflation mix, profits, and investor sentiment. But they also impact countries differently."

"First, the oil price shock is transitory as geopolitical risk abates, supported by still-high global supply. This is disruptive, but should leave the base case on track. Growth can be sustained by supportive policies, strong (and broadening) profits, and the AI capex boom."

"Alternatively, a longer-lasting oil price spike could present a challenge to the investment outlook. A persistent shock of more than USD20, or oil above USD100 – as we last saw in 2022 – would be more disruptive to growth, which could hamper profits, and potentially undermine stock market multiples."

"So, what could a persistent USD10 shock do? Modelling shows that the growth and inflation impact on developed economies would be largely uniform. But in emerging markets, it’s more variable."

"With some parts of global markets, particularly in the US, now “priced for perfection”, any adverse news could challenge performance. However, valuation gaps in emerging markets and developed market ex-US stocks, create some cushion against negative macro shocks."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)