Key Takeaways
- Stock markets have fallen but not crashed, reflecting the likely limited impact on Western economies.
- European airline stocks have suffered the most impact amid airspace closures and the spread of war to holiday destinations.
- Some European stocks in the tech sector are now screening as undervalued after this week’s share price falls.
The conflict in the Middle East has dominated the headlines for a week now, but the impact on the world’s stock markets has not yet matched doomsday scenarios: while the Morningstar Europe Index is down nearly 5% over this period, the Morningstar US Market Index has fallen by around 1%.
The increase in oil prices has been more significant, with the price of West Texas Intermediate crude oil rising above USD 84 over the past week. That is good news for energy sector investors, but it’s not unprecedented—the oil price briefly hit similar levels this time last year, when the threat of a global conflict was much less pronounced.
While stock market indexes didn’t move materially on the news of the war with Iran, there were much bigger moves on a sector basis. Oil stocks have been the big winners. And shipping stocks, from carriers like Maersk MAERSK B to third party logistics firms like Kuehne + Nagel KNIN, have risen by as much as 10% over the last week. The problem with these sectors, from an investment perspective, is that there isn’t a lot of value here.
Morningstar analysts don’t see any value in the shipping sector currently, and global oil is no better. There is not a single buy on our European coverage list currently, and the oil majors both sides of the Atlantic are at best fairly valued.
As Airlines Stocks Suffer, easyJet Has Upside
Airline stocks have been among the biggest losers of the conflict. Airspace closures and the spread of war to holiday destinations and transfer hubs in the Middle East have knocked 10% or more off many European airline stocks. But despite these falls, many of the airline stocks are not screening as attractive. The fundamentals are just not positive enough now. The exception here is easyJet EZJ where there is more than 50% upside, to a large degree driven by a cost-restructuring program undertaken by the firm.
Undervalued Stocks to Watch
With little direct or indirect exposure to the current conflict, investors could be shifting their attitudes toward tech stocks from fear to opportunity. This is backed up by flows data into global tech funds, which show sustained inflows over the last week or so. Morningstar believes valuations are sufficiently attractive now to warrant investment. In Europe, names like Wolters Kluwer WKL, RELX RELX, SAP SAP, and Dassault Systemes DSY are top of our list right now.
What Events Move Stock Markets?
Isolated conflicts, like the recent conflict between Israel, Hamas, and Hezbollah, didn’t move markets. But a wider conflict that draws in more nations in the region always has the potential to rock equity markets.
Thus far, this conflict has been widespread, with attacks reaching nations like the UAE, Kuwait and Qatar. In this respect the conflict already has the potential to cause panic in equity markets. But the lack of repercussions for the Western economy may limit the impact on stock prices.
Oil prices have spiked, but Morningstar believes the price will gradually fall back to our long-term medium cycle forecast level of USD 65. Unlike the 1970s oil crisis, the big difference this time is that the US is a net exporter of oil, so the power of Middle Eastern nations to disrupt global supply is much weaker.
Could the Strait of Hormuz Disruption Push Oil Prices Higher Still?
A full closure of the Strait of Hormuz, which a fifth of the world’s oil and gas passes through, will have an impact on energy prices, and this is very much still on the cards. But it is likely that disruption here will not be prolonged. Unlike the Suez Canal blockage of 2021, the waters around Iran are not anywhere near as exposed to global shipping traffic, thus the knock-on effects of the conflict to global supply disruption, and inflation, are much lower.
The threat of prolonged conflict in the region will of course drive stock markets lower, and at the very least it will be difficult for markets to rise from here with the conflict overhang. This is particularly true for the US, as markets had been banking on the Federal Reserve lowering rates in 2026, which will be difficult for the US central bank to do if the oil price, and consequently inflation, remains high, even in the short term.
