Navigating Tensions in the Red Sea

Key Insights

Red Sea Tensions: Heightened geopolitical pressures in the Red Sea, escalated by Houthi assaults and subsequent Western military actions, have rerouted maritime traffic to avoid these risky waters, leading to the most substantial disruptions in global trade since the Covid-19 pandemic, raising shipping costs, potentially fueling global inflation, and threatening the fragile recovery of supply chains; all while underscoring the Red Sea’s critical role as a trade conduit, especially pivotal for energy supplies amidst Russian sanctions.

• Saudi Arabia’s pause of oil production capacity expansion by over a million barrels daily by 2027 reflects OPEC+’s strategic response to global oil market fundamentals and the challenge of competing with emergent producers like US shale. This suggests OPEC+’s short-term commitment to a baseline price of $70/barrel on a Brent basis.
• With a current production capacity of 12m bpd, Saudi Arabia’s self-imposed reduction to approximately 9m bpd reflects a cautious outlook on future oil demand growth and an adaptation to the impending energy transition, eschewing the maintenance of expensive surplus capacity.
• The Wealth Outlook 2024 anticipates a transitional year as economic stabilize postCOVID-19 with slower growth expected in early 2024 before a potential expansion from the second half of 2024 and into 2025.
• The Gulf Cooperation Council (GCC) is projected to experience a deceleration, with a mere 0.1% year-on-year GDP growth in 2024 due to voluntary OPEC+ production cuts put in place last year, and softer oil prices, after an impressive 7.7% growth in 2022.
• GCC market performance in 2023 was diverse; the regional equity index modestly increased by 3.7%. Within the GCC, four markets gained, with Dubai and Saudi Arabia’s indices notably increasing by 21.7% and 14.2%, respectively, due to strong investor sentiment and solid earnings in major companies.
• Equity Market Strategy: We continue to see opportunity in global equities markets through broadening earnings and equity performance beyond large cap US tech. The GCC’s strategic positioning favors cyclical markets. Our Global Investment Committee maintains a neutral allocation to Emerging Market equities and would expect to increase this exposure in the coming months as many non-US equities in cyclical industries reach trough levels and eventually discount a stronger world growth recovery in 2025. (See Quadrant | Welcome to 2024. No Collapse in Sight.)