Viewpoints with Burkhard Varnholt - A global markets podcast (Ep. 61)

0:00Hi everyone, Dan Cassidy here. Welcome back to the viewpoints podcast series here on the UBS Market Moves podcast channel with my colleague, Burkard Varnholz. A Burkard welcome back to our regular podcast that tries to make some market sense of our topsy, Tervy World. I know Burkard the last time we spoke oil and gas prices were surging, a bit straight of whoremoves was closed and stocks were tumbling and yet as we speak today, Wall Street trades higher than it did before the conflict started and bond yields are trending lower. So what a difference a few days can make. I'm curious Burkard, how should investors read all of this? Well, look, I think markets are sniffing that both sides are clearly more constrained than they would like to say. The Iranian revolutionary got clearly understands the overwhelming military power of the US and Israel and they absolutely fear the existential threats that they face and that's why

1:06throughout this conflict that's always maintained negotiations and will continue to do so. Meanwhile, Donald Trump also wants to call it a day and get the truth back. He knows that long wars are deeply unpopular, hard to control and that the 45 days of attacks dramatically weaken the Iranian military. Furthermore, the rest of the world also got the message that it's high time to reduce dependency on Middle Eastern oil. The whole world is literally seeking to adjust. They are all looking to find new sources of supply. Everyone is trying to speed up electrification, especially all of Asia and the transition to renewables to improve fuel and fertilizer efficiency and so on. Saudi's also their backup oil pipeline is now fully functional. So all said what we see here is that crisis can sometimes be a blessing in disguise. They create that rare sense of urgency,

2:08which at least right here right now speeds up the Herkulean task of the energy transition, which of course we discussed here many times before. Note in that context that the S&P clean energy transition index is steadily risen throughout the last few weeks, even during the conflict. It's now up more than 70% for the last 12 months and I think that well illustrates how crisis can also create opportunities, not just investment opportunities, but really even societal opportunities. And global markets, last but not least, I think they understand very well how this complex situation is evolving and that's why they're so sanguine to them, the darkest moment of the crisis or even the darkest moment for the stock market if you will lies behind us. And now it's time to pay tribute to yet another impressive earning season and that's why we're still expecting 7500 for the S&P 500 later this year. Now, Berker, the stock market recovery is one thing,

3:16but the impact of still higher oil and gas and fertilizer prices on consumer inflation, that's quite another. How do you expect central banks to deal with this? Well, you know, Dan, I never really understood why higher interest rates could help here. In my book, there's absolutely nothing that that can do to resolve the interruption in Middle East and all supply, nor do I think would high interest rates alleviate the price increases of gasoline or fertilizers. I mean, what's the benefit? You really think that oil prices would fall if you as interest rates were to rise? I mean, that would only be true if you raised rates so hard that you didn't force the recession, but of course, that'd be deeply cynical. As a consumer, first you'd get hit at the pump and the next thing is you turn around and they hit you with higher mortgage rates. No, no, no, no, I really don't think that that's how central banks should fight the supply shock and I absolutely don't expect them to do that just that. It just

4:17seems much more sensible to me to, you know, allow consumers and the economy to recover from the oil and gas price shock and trust that they had what it takes to heal from all of this without any extra help or even monetary tightening. So, you know, I think monetary policy can cool inflation when like demand is running so hot like after it did after the lockdown stimulus that it's driving up prices. That's when higher rates can actually be useful to slow consumer shopping spree and to cool prices in little just like they did a couple of years ago. But when oil prices rise because suddenly the straight-up of a motor flows and there's really not a whole lot of central bank in due to health. So, our view, our UDS house, your monetary policy is actually much more sanguine than the initial market reaction seems to have been. We expect that most central banks will hold their horses, take a deep breath and consumer prices will settle and stock will

5:23grind higher. As I said, we still expect 7,500 for the S&D 500 by the end of this year. Okay, well, Berkhar, those are all valid arguments. But what about the straight-of-war moves? Do you really expect the conflict to end soon and free-sailing to resume? Well, look here's what I think. For one, you know, I can perfectly well imagine that the hostilities between Israel and Iran continue for longer, even for several years. You know, the, you know, Israel and Iran, historically, they've always had a very good relationship. Things only went sour with the Islamic Revolution in 1979, famed for the U.S. of course. And since then, so for a little more than 45 years now, the two countries have just been fierce antagonists. And frankly, I don't see any sign of appeasement just yet. But, you know, markets learn to live with wars, just like the one in Ukraine or just like the continuous conflict across the Middle East for the

6:25last 80 years, if you will. And remember, you know, after the tanker wars during 1984 to 1987, when the Iraqis sent their exosite rockets to put the Gulf of Persia into fire, the straight was ultimately cleared by an international slotilla of minesweepers, not only from the U.S, but also from Europe and the Soviet Union back in the days. So I think it's been to reason that this time around, again, another international slotilla, including both from China, India, and Europe, will help secure and clear the strata for most once the fog of war is lifted. So here's the bottom line, I think. I think markets are right in sniffing that the risk of a physical oil crisis is fading. And that's why they're looking through it, the through the fog of war, and paying tribute again to the extraordinary resilient corporate profits, the U.S. economy, and our

7:30roaring 20s scenario. Well, Berkard, that's good to hear, and let's, indeed, hope that the conflict ends and companies can go back to business. As always, Berkard, it's great to catch up with you. Thank you for dropping by today, wishing you a good rest of the day, and look forward to continuing with our conversation again soon. Same here. Thanks very much. Thanks for having me, Dan. It's always great to come by and speak again soon. Take care for now. Bye-bye. Such as UBS Trending. You can also follow us on Instagram for content highlights. At UBS Trending, UBS Studios is part of the UBS Chief Investment Office within UBS Global Wealth Management. Visit UBS.com slash CIO to view the latest research. UBS Financial Services Inc. does not provide legal or tax advice, and this does not constitute

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