Not so long ago, the stock market was promised a brighter tomorrow as we welcomes rate cut season from central banks. JCI rallied and record an all-time-high as Indonesia benefit from the rate cut season with surging strength of the Rupiah.
1 Year JCI and USD IDR Exchange Rate Performance
However, the tension in the middle east worsen recently and sparked concern that a full scale of war may happen and spread wider to the rest of the world.
Recently Israel has launched heavy airstrikes on Hezbollah targets in Lebanon, including key infrastructure and senior leadership. One of the most notable strikes occurred on September 27, targeting Hezbollah's central headquarters in Beirut's southern suburbs.
In our view, geopolitical risk is the current equity market's biggest risk. The ongoing wars aren't just a conflicts between individual countries, but a proxy war between the west and BRICS nations.
What made us more concern on geopolitical tension outlook is that recently Vladimir Putin has changed Russia's nuclear doctrine, creating bigger possibility that tactical nuclear may be used in the future.
If the war continues to escalate and spread further, we believe this will cause disruption in oil distribution, specifically in the Strait of Hormuz.
The Strait of Hormuz is a critical chokepoint for global oil supply, facilitating the transportation of approximately 20-25% of the global oil supply. This narrow waterway, about 21 miles wide at its narrowest point, connects the Persian Gulf to the Arabian Sea and beyond.
Major oil-exporting countries like Saudi Arabia, Iran, the UAE, and Iraq depend on it to export crude oil. Its strategic importance lies in the volume of oil it handles daily (c. 15 million barrels), making any disruption in this region potentially impactful to global energy markets.
Therefore, we suggest to revisit commodity stocks (specifically related to energy) on the back of: 1) worsening geopolitical tension which may create disruption on energy supplies; 2) should geopolitics remain stable, Indonesia is likely benefit to the recovering of China economy post recent government stimulus plan.
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