Update on Middle East Tensions

Iranian attack on Israel increases risk of escalation in the Middle East.

Key Points

  • On April 13, Iran decided to strike Israel with 300 drones and missiles following an attack on its diplomatic compound in Syria.
  • Regional escalation and oil price are at risk. This tail risk cannot be ignored. We are closely monitoring the unfolding situation.
  • Candriam has very limited exposures in Israel and its neighbours, which are reassessed regularly

A new threshold

Six months after the Hamas aggression of October 7, the escalation of tensions in the Middle East crossed a new threshold this past weekend. Two weeks after the air strike attributed to Israel on the Iranian consulate in Damascus, Iran retaliated by targeting Israeli territory directly from its soil for the first time since the creation of the Hebrew state. Although the damage appears to have been limited, with the Israeli anti-missile system having intercepted most of the 300 or so drones and missiles launched by Iran, the escalation continues and is fuelling the risk of a regional conflagration.


Oil price at risk

For the global economy, the main threat lies in an increase in the price of oil. While announcements of production cuts by OPEC and Russia had already contributed to tighten the market in recent weeks, pushing the price of Brent crude from under $80/b in early January to $90/b in early April[1], the risk of it rising well above $100/b is real.

With almost a third of the world's oil production, the importance of the Middle East to the equilibrium of this market needs no reminding. Iran's place in this equilibrium has changed significantly, however: since 2021, its production has risen by more than 1.5 million barrels a day to exceed 4 million today[2]. This makes Iran the second largest oil producer in the Middle East, behind Saudi Arabia. Geography also gives Iran a key role, since around 20% of the world's oil production transits through the Strait of Hormuz, controlled by Oman... and Iran.


Our scenario of easing monetary policies remains in place 

For the time being, we maintain our scenario of falling inflation and easing monetary policies in both the US and the eurozone. If diplomatic channels fail to curb the logic of escalation, the price of oil could rapidly reach $120/b[3]. If sustained, such an oil prices increase would add 0.9% to inflation in the United States and 0.6% in the eurozone[4]. Paradoxically, by contributing to slowing the US economy, this additional inflation should not prevent the Federal Reserve from cutting interest rates in 2024. In the Eurozone, where growth has been stagnating for over a year, a new shock would put an end to the tentative economic recovery observed recently, and risk pushing the economy into recession. Although there could be dissension among central bankers, it is likely that the recessionary shock will prompt the ECB to loosen its monetary policy.


More volatility to come 

In any case, such a rise in oil prices linked to a supply shock would at least temporarily put an end to the "risk on" mode. The risk of stagflation is the most damaging for risky assets. For the time being, as financial markets seem to be doing, we consider this risk to be a "tail risk" that we cannot, however, ignore.

In this "tail risk" scenario, equities and bonds in a diversified portfolio could initially be penalized, the only protective assets being oil, gold, the US dollar and volatility (portfolio protection options). In a second phase, if economic growth is affected, government bonds could benefit from lower rates as oil prices stabilize and then fall (lower demand), while equities would remain penalized. Regional allocation should be more favourable to US equities, the UK market (FTSE 100, benefiting from a commodities and defensive component) compared to equities in the Eurozone, Japan and emerging markets.

This is not our central scenario, which remains constructive for the time being, but a rise in geopolitical risks in the run-up to the US elections in the second half of the year could lead to an increase in risk premiums and volatility, compared with a much more favourable first half than expected.


Marginal and selective exposure.

Candriam funds have no sovereign exposure to Israel. The country is not included in the Emerging Sovereign Benchmark[5]given Israel’s higher income.  

Regarding Israeli companies, Candriam has 0.3% of its total bond exposure in TEVA, the world’s largest generic drug manufacturer.

Some software companies have activities incorporated in Israel as the high technology sector represents 48% of Israel exports and 18% of its GDP[6]. This exposure accounts for only 0.03% of Candriam’s total equity exposure.

Regarding Israel’s neighbours, Candriam funds have no sovereign exposure to Jordan, only a residual exposure to Hikma Pharmaceuticals accounting for 0.03% of Candriam’s total equity exposure. Candriam funds have no exposure to Syria which we classify as an Oppressive Regime, nor to Lebanon as it is excluded by article 9 funds.

Finally, Egypt sovereign accounts for 0.04% of Candriam’s total bond exposure.






This document is provided for information and educational purposes only and may contain Candriam’s opinion and proprietary information. The opinions, analysis and views expressed in this document are provided for information purposes only, it does not constitute an offer to buy or sell financial instruments, nor does it represent an investment recommendation or confirm any kind of transaction.

Although Candriam selects carefully the data and sources within this document, errors or omissions cannot be excluded a priori. Candriam cannot be held liable for any direct or indirect losses as a result of the use of this document. The intellectual property rights of Candriam must be respected at all times, contents of this document may not be reproduced without prior written approval.

The present document does not constitute investment research as defined by Article 36, paragraph 1 of the Commission delegated regulation (EU) 2017/565. Candriam stresses that this information has not been prepared in compliance with the legal provisions promoting independent investment research, and that it is not subject to any restriction prohibiting the execution of transactions prior to the dissemination of investment research.

This document is not intended to promote and/or offer and/or sell any product or service. The document is also not intended to solicit any request for providing services.


[1] Source: Datastream
[2] Source : Datastream
[3] Source : Candriam’s estimate
[4] Source :  Candriam’s estimate
[5] JPMorgan EMBI Global Diversified Total Return
[6] Source: Israel Innovation Authority, 2023 Annual Report  

  • Nicolas Forest
    Nicolas Forest
    Chief Investment Officer
  • Nadège Dufossé, CFA
    Nadège Dufossé, CFA
    Global Head of Multi-Asset, Member of the Executive Committee
  • Emile Gagna
    Emile Gagna

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