I don’t want to set the world on fire.I just want to start a flame in your heart.
—The Ink Spots
In the Middle East, violence is never just violence.
Look closer. You’ll see that violence here is actually a form of communication. You can think of it like a cultural dance, with choreographed steps.
When the music begins, there’s a very particular sequence that must happen.
Sometimes you need to step to your left. Sometimes you need to step to your right. And sometimes, you need to clap your hands and sing a song.
If you like, you can call this ‘verbal jujitsu’.
To understand it better, just think about this historical event from a few years ago:
- On 3 January, 2020, the United States conducted a drone strike in Iraq which killed General Qasem Soleimani. At the time, Soleimani was reportedly the second-most powerful man in Iran after Supreme Leader Ayatollah Ali Khamenei himself.
- Naturally enough, revenge was on the cards. So, just past midnight on 8 January, 2020, the Iraqi prime minister received a message from Iran. He was warned that a ‘response’ to General Soleimani’s death was about to happen. The prime minister immediately passed this message on to the United States.
- Sure enough, later that morning, an assault was launched on two American bases in Iraq. At the time, this was the largest ballistic-missile attack that US forces had ever faced.
- However, the Americans were well-prepared for this onslaught. Defensive measures were rolled out. So, in the immediate aftermath, there were injuries but no deaths.
- The Iranians had a codename for this attack. Appropriately enough, they called it Operation Martyr Soleimani.
Now, if you need a simplified explanation of what actually happened, here it is:
- Just imagine two street fighters are facing off. They start engaging in a brawl. Fighter #1 punches Fighter #2 square in the face, giving him a bloody nose. Fighter #2 is left gasping and reeling from the blow.
- So what does he do? Well, he yells out, ‘You have humiliated me. So I will punch you back, but I will only hit you in the jaw. I will only do it at half-strength. Just enough to bruise, but not enough to draw blood. Here we go…’
- Well, this sounds like a strange response, doesn’t it? Why does Fighter #2 announce his punch ahead of time? What possible benefit does he get from doing this?
- Well, oddly enough, the logic of this is simple. Fighter #2 needs to save his pride, but at the same time, he must careful enough to control his use of violence. Therefore, he communicates his intention clearly to Fighter #1, so that there’s mutual understanding.
- The display of force must be precisely measured. It will not exceed a certain threshold. And the outcome must be acceptable for both of them. There will be a compromise in violence. This punch for that punch. Tit for tat. No less, no more.
So, with that in mind, let’s fast-forward to the current situation in the Middle East:
- On 1 April, 2024, an Israeli drone strike was carried out on the Iranian consulate in Syria. This killed an Iranian general — Mohammad Reza Zahedi. Zahedi was reportedly responsible for providing material aid to Hezbollah in Lebanon, which is currently in conflict with Israel.
- So, once again, Iranian revenge is on the cards. Supreme Leader Ayatollah Ali Khamenei issued a statement, threatening to ‘slap’ Israel.
Much like before, advance warnings were provided ahead of time:
- On 12 April, American intelligence revealed that Iran would launch an assault on Israel within 24 to 48 hours. This was a very specific time frame. This allowed America and its allies to strategically reposition their forces in the region in support of Israel.
- Then, on 13 April, Iran’s first official act of aggression began. It started, curiously enough, in a pretty low-key fashion. The MSC Aries was a Portuguese-flagged container ship associated with Israeli billionaire Eyal Offer. Iranian helicopters swooped in and dropped commandos on the deck of the ship while it was travelling through the Strait of Hormuz. They seized the ship, almost as an opening ceremony.
- Shortly after, the real fireworks started. Iran launched over 300 drones, cruise missiles, and ballistic missiles. Fortunately, by this point, Israel had several hours’ warning. There was sufficient time to temporarily close schools, limit public gatherings, and prepare bomb shelters.
When the attack was launched, there was an official press statement released by Iran’s Islamic Revolutionary Guard Corps. It went like this:
‘We launched an operation using drones and missiles in response to the Zionist entity’s crime of targeting the Iranian consulate in Syria.
‘The operation was carried out with dozens of missiles and drones to strike specific targets in the occupied territories.’
So, in the aftermath, this has happened:
- Forces from the United States, the United Kingdom, Jordan, and Israel have successfully intercepted most of the drones and missiles, shooting them down. Their success rate was 99%.
- Only one Israeli Defence Force base has received minor damage. Meanwhile, a Bedouin girl has suffered a head injury from shrapnel, but no other casualties have been reported.
Conducted on the strength of Article 51 of the UN Charter pertaining to legitimate defense, Iran’s military action was in response to the Zionist regime’s aggression against our diplomatic premises in Damascus. The matter can be deemed concluded. However, should the Israeli…
— Permanent Mission of I.R.Iran to UN, NY (@Iran_UN) April 13, 2024
- Iran’s envoy to the United Nations has issued a statement, justifying the attack, but calling the matter ‘concluded’. This appeared to signal an end to Iran’s offensive, while leaving the door open for Iran to save face.
- Iran’s foreign minister, Hossein Amirabdollahian, has also issued a statement: ‘About 72 hours prior to our operations, we informed our friends and neighbors in the region that Iran’s response against Israel was certain, legitimate, and irrevocable.’ Interestingly enough, by doing this on purpose, Iran may have intended to reduce the risk of escalation.
Yes, emotions are running high. But here’s what you need to think about:
- Once again, Iran has announced its punches ahead of time. Yes, the country wants to flex its military muscle — but it’s also careful to calibrate its use of force.
- There’s element of circus-like showmanship here. Iran has used just enough violence to score political points, but not enough to be physically devastating. Indeed, as misguided as the Iranians may be, they do act in a predictable way.
- You shouldn’t forget that ultranationalists exist in every country — and in Iran, it’s no different. There’s a domestic audience there who wants a show of force, and they will be appeased by a show of force. Even if it’s only that: a show.
Meanwhile, in Israel, the situation is not too different:
- Hardliners in the Israeli government have demanded a firm response to Iranian aggression.
- So, on 19 April, Israel launched what appeared to be a single surgical strike inside Iran.
- Explosions were heard in the city of Isfahan. A military airbase may have been targeted.
- In this instance, Israel’s retaliation seems to be carefully measured. This isn’t an all-out assault. Instead, this appears to be a limited and narrow response. The intention is to project strength.
- Interestingly enough, in the aftermath of the strike, both Israeli and Iranian officials refrained from making immediate statements about what actually happened. Instead, it was US officials and the media that provided most of the initial commentary.
- Later, an Iranian official did make a statement, but it was quite mild: ‘The foreign source of the incident has not been confirmed. We have not received any external attack, and the discussion leans more towards infiltration than attack.’ He appeared to lower the temperature, downplaying any suggestion that Iran would immediately retaliate.
So, is more trouble in the Middle East possible? Yes, of course. But even so, history tells us that geopolitical news doesn’t sway the market for very long:
- For one thing, it’s important to understand that fighting is a way of life in the Middle East. After all, this is the ancient birthplace of fanatics, terrorists, and assassins.
- The legacy of revenge is hardwired into the region’s DNA. All this has happened before. All this will happen again.
- Since April 1, the market has already been considering the possibility of a punch-up between Iran and Israel. There was rumour and innuendo.
- But now that things have already happened, the market will likely digest all available information, then it will immediately price ahead and move forward. This may happen quicker than most people think.
Source: Bloomberg
So, ultimately, here’s what investors should be mindful of:
- Continue to pray for Israel. Continue to pray for peace in the region. They need all the goodwill they can get during a time of conflict.
- Meanwhile, when it comes to the stock market, emotions are best kept in check. The temptation to click ‘SELL’ during a crisis may be strong. But fund manager Peter Lynch believes it’s the wrong move. He says: ‘Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.’
- Yes, you may see some volatility with assets that are perceived to be riskier. For example, stocks related to travel and tourism may experience a sell-off. Also, the price of oil and gold may experience a bounce as speculators make a bet on them.
- However, looking beyond Iran-Israel, the market is actually more concerned with longer-term issues — corporate earnings, inflationary pressure, and interest rates. Indeed, moving forward, this is what will drive the agenda for most investors.
- It’s important to note that all storms — even the most turbulent ones — eventually pass, giving way to brighter days ahead. The trick is to look beyond the fear.
Are you still feeling concerned?
- Well, if you are, you can always reach out to me at cs@wealthmorning.com
- I can’t give you personal financial advice. However, I’m always happy to have a chat with you about the state of the world.
- Meanwhile, stay resilient. Continue investing. This is the name of the game.
Regards,
John Ling
Analyst, Wealth Morning
(This article is the author’s personal opinion and commentary only. It is general in nature and should not be construed as any financial or investment advice. Past performance does not indicate the future. Wealth Morning offers Managed Account Services for Wholesale or Eligible Investors as defined in the Financial Markets Conduct Act 2013.)