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What rising geopolitical tensions could

mean for the markets and economy
Chief Investment Officer Chris Hyzy asks several experts about
today’s volatile global situation and the steps investors might
consider taking now

How we can help

WITH ALL EYES ON THE TRAGIC SITUATION IN
THE MIDDLE EAST, the first concern is for the Explore what it’s like to work with a
victims of the terror attack in Israel and the Merrill Financial Advisor
ensuing humanitarian crisis. The war comes
even as we remain concerned about continuing
Start here
conflict in Ukraine and tension in the Indo-
Pacific that have created a new level of
uncertainty over the potential impact of global
turmoil on the economy and financial markets. “Geopolitics used to
“Geopolitics used to be considered a lower-level be considered a
financial risk. Now, it may be the top risk,” says lower-level financial
Chris Hyzy, Chief Investment Officer for Merrill risk. Now, it may be
and Bank of America Private Bank.
the top risk.”
Moreover, the geopolitical tensions come at a
— Chris Hyzy, Chief
time of uncertainty over the direction of the U.S.
Investment Officer for
economy. “We are on fragile ground globally and
Merrill and Bank of America
in rare territory in terms of the business cycle at
Private Bank
home,” Hyzy says. “In a volatile world,
understanding the risks and keeping a wide lens
on the opportunities that develop are arguably
more important than ever.”

Below, Hyzy asks several top analysts from BofA Global Research and the Chief
Investment Office to weigh in on the potential impact of today’s heightened global
tensions and what it could mean for your portfolio.

“We have found that geopolitical shocks such as 9/11,

Brexit and even the prolonged Russia-Ukraine war have
not had a meaningful impact on U.S. corporate earnings.”

— Savita Subramanian, head of U.S. Equity & Quantitative Strategy

and head of Global ESG Research, BofA Global Research

Q: Savita, what sectors are likely to be most affected by the current

conditions, and how are markets generally likely to respond?

A: Oil price spikes from potential supply shocks could hit U.S. consumption, but
contrary to popular belief, that’s more likely to affect consumer staples —
supermarkets, discount retailers and personal products — than higher price-point
retailers in consumer discretionary. That’s one reason for our underweight position
in consumer staples vs. our overweight in consumer discretionary. Energy
companies could benefit from higher oil prices, and U.S. energy
independence could otherwise soften the impact of global supply shocks. More
generally, history tells us that geopolitical shocks that don’t fundamentally impact
the economy have tended to result in a 5% to 10% pullback in the S&P 500.
Fortunately, our research shows markets have typically more than recovered from
such losses within three months1.

Q: How are corporate profits likely to be affected?

A: We have found that geopolitical shocks, such as 9/11, Brexit and even the
prolonged Russia-Ukraine war, have not had a meaningful impact on U.S. corporate
earnings. But the Israel and Gaza crisis could affect profits in some sectors.
Amplified U.S. defense spending could benefit aerospace, defense and some
industrials. But a longer, broader conflict could create greater uncertainty around
global trade, demand for overseas travel and the risk of an oil embargo. Earnings for
U.S. multinational companies may be affected if oil shocks and uncertainty cause
growth to slow in Europe.

“The risk of a Persian Gulf shutdown could push oil prices

above $130 a barrel. If shipments through the Strait of
Hormuz were stopped for a meaningful period, oil could
spike to above $250 a barrel.”

— Francisco Blanch, head of Global Commodities, Cross-Asset

Quantitative Strategies and Equity Derivatives Research, BofA Global Research

Q. Let’s take a deeper look at the global oil markets, Francisco. What
might the conflict in the Middle East mean for global oil prices?

A: Israeli-Palestinian conflicts since 1973 have had a limited impact on energy

prices because they have mostly been contained. The key question is whether this
conflict will broaden regionally. If it does, the risk of a Persian Gulf shutdown could
push oil prices above $130 a barrel. If shipments through the Strait of Hormuz, a
choke point for nearly 20% of the world's oil and liquified natural gas (LNG), were
stopped for a meaningful period, oil could spike to above $250 a barrel and LNG
might surpass $50 per million Btu (MMBTU). Even if the conflict doesn’t broaden,
the U.S. could decide to enforce Iranian oil sanctions, curbing global oil supply in
2024 and likely pushing oil and LNG prices higher.

Q: What’s the outlook for other commodities?

A: In the short run, the big beneficiary of rising geopolitical risk is gold, which has
moved up very fast in recent days to reflect the increased Middle East tensions. In
contrast, base metals may face further headwinds in the short term, although we
believe that the downside for most commodities will ultimately be limited. Longer
term, as the world economy moves from fossil fuel to renewable energy, we remain
constructive on energy-transition commodities.

“At present, the global economic impact has been low

and the broader financial markets have not yet priced in
the potential tail risks of further escalation.”

— Joe Quinlan, head of CIO Market Strategy, Chief Investment Office,

Merrill and Bank of America Private Bank

Q: Joe, what risks are you watching for, especially if the very fluid
Middle East conflict becomes protracted?

A: Throughout the year economic and market conditions have had quite a few
headwinds blowing every other month while rates have headed consistently higher.
Now, geopolitical risk has taken another significant turn higher with the tragic
events in the Middle East. While we can’t foresee how events may unfold from here,
at present, the global economic impact has been low and the broader financial
markets have not yet priced in the potential tail risks of further escalation. We can
only hope that the current conflict remains as contained as possible. If the situation
does escalate, the potential risks include an oil price shock, an even stronger U.S.
Dollar, higher gold prices, much slower than expected global economic growth,
elevated pressure on emerging markets, further weakness in small-cap stocks and
less profitable high-growth shares.

Q: Does the current situation change how investors should view

international equities, including developed and emerging markets?

A: The conflict reinforces our tactical strategy for caution on international markets.
Although international developed and emerging markets continue to trade at a
discount to U.S. equities and offer relatively attractive dividend yields, the risks in
those markets in the near term favor more U.S.-centric portfolio positioning and
higher-quality assets overall. Significantly elevated geopolitical risk outweighs the
sizable discounted valuation of emerging markets, in particular, at this point — at
least until we are firmly in the part of the cycle where the Federal Reserve has cut
rates and a new expansion is within sight. We’re also watching Europe and China,
where a resulting spike in oil prices could have significant consequences for their
economies.

Given today’s rising geopolitical tension, the CIO continues to emphasize a high
degree of portfolio diversification, which could include alternative investments for
qualified investors, exposure to energy, mining and minerals, as well as defense and
cyber security. This may include investments in entire sectors or individual
securities, where appropriate.

“Diversification across asset classes, industries and

geographies can help dampen volatility during times of
acute market stress.”

— Marci McGregor, head of Portfolio Strategy, Chief Investment Office,

Merrill and Bank of America Private Bank

Q: Marci, how should investors be thinking about their portfolios at this

time?

A: Acute geopolitical events create uncertainty for markets and can drive spikes in
market volatility. For investors, it’s critical for clients to consider the big picture and
what impact, if any, the current environment will have on longer-term economic
growth, energy production, government spending and other variables. Our view is
that, ultimately, it’s the fundamentals of economic growth, corporate profits,
interest rates and inflation that will determine the direction of markets.

Q: How can diversification help investors amid heightened geopolitical

tensions?

A: Diversification across asset classes, industries and geographies can help dampen
volatility during times of acute market stress. High-quality assets, including high-
quality bonds, as well as other investments with a low correlation to each other can
also provide diversification benefits during periods of market stress.

Q: Given all the factors driving global uncertainty and volatility, what is
the CIO’s near-term outlook? Are there specific steps investors could
consider?

A: We expect markets to resume a subtle upward trend prior to year-end, with solid
corporate earnings and a stabilization in bond yields as the main catalysts to
support equity markets. Fixed income markets are likely to price in a “higher for
longer” interest rate policy that would provide attractive real yields for income-
based investors. A strong U.S. dollar, oil prices that remain firm and a sentiment for
higher-quality assets are also probable.

We continue to emphasize staying balanced and fully diversified as uncertainty and

geopolitical risks remain elevated. But periods of market volatility such as we’re
seeing now can present opportunities to rebalance, or to realign with an asset
allocation plan designed for your goals.

Keeping a long-term perspective

In the midst of rising geopolitical tension, maintaining a long-term perspective can

be challenging. “But now is an especially important time to avoid making sudden
portfolio decisions in response to daily events,” Hyzy cautions. “We’re following
events in the Middle East and around the world, and we’ll be updating our
perspectives with new insights as things evolve.” In the meantime, stay focused on
your goals, he advises. “If you’re working with an advisor, a conversation with them
can help you determine whether any portfolio adjustments are warranted.”

1
“Why would you want to own the S&P 500 if …”, U.S. Equity & Quantitative Strategy, BofA Global Research,
Oct. 12, 2023.

IMPORTANT DISCLOSURES

Opinions are as of 10/24/2023 and are subject to change.

Investing involves risk, including the possible loss of principal. Past performance is no guarantee
of future results.

This information should not be construed as investment advice and is subject to change. It is provided for
informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or
any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail
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BofA Global Research is research produced by BofA Securities, Inc. (“BofAS”) and/or one or more of its
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The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy
and global markets; portfolio management solutions; due diligence; and solutions oversight and data
analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America,
N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a
registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America
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Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining
markets.

Investments have varying degrees of risk. Some of the risks involved with equity securities include the
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