COLUMN - On 28 February the United States and Israel carried out strikes in Iran that killed the country’s Supreme Leader, Ayatollah Ali Khamenei. Events like this are a reminder of why market forecasts made at the start of the year rarely survive contact with reality.
Recent bombings in Iran have escalated tensions and raised the usual questions. Will this become a prolonged conflict? Will it remain a short intervention? What will it mean for global trade, currencies, and markets?
You will hear many opinions in the coming weeks. Experts will explain what they think is likely to happen and how markets should respond. But the reality is that no one really knows.
In moments like this there are two ways to interpret events: qualitative and quantitative.
The qualitative side is the commentary. Expert opinions, geopolitical analysis, forecasts about how things might unfold. The problem is that these views are almost impossible to measure or test.
The quantitative side is the market.
Markets process enormous amounts of information almost instantaneously. When an event like the recent bombing occurs, every conceivable piece of available data is fed immediately into sophisticated models used by the world’s largest financial institutions. These models, which cost billions of dollars to develop and maintain, are run by teams of analysts and quantitative researchers working for hedge funds, sovereign wealth funds, pension funds, and global banks.
Within moments these systems simulate countless possible outcomes and investors act on those outputs. By the time most of us hear the news on television or see it on social media, the market has already processed the event, run the scenarios, and adjusted prices accordingly.
That is what I find so fascinating about markets. We are not watching opinions form in real time. We are seeing the outcome of an enormous amount of information processing that has already taken place.
And the result of all that analysis ultimately shows up in one place: market prices.
That means we can often look at market data to get a sense of how investors collectively see the situation. Take South Africa’s 10 year government bond yield, the rate at which investors are willing to lend money to the country. Despite the geopolitical shock, the move has been relatively small.
After a long period of declining yields we have seen only a modest spike -
In other words, based on all information currently available, the market does not see a significant impact on South Africa’s economic outlook.
We have also seen the rand weaken slightly against the dollar, moving from roughly R16 to around R16.50 at the time of writing.
At first glance that may look like a South Africa specific issue. But when we look at the Dollar Index, which measures the dollar against major global currencies, we see a similar pattern.
The dollar had been weakening over the past year. The recent spike simply reflects something we see repeatedly during periods of uncertainty. Global capital flows back toward the dollar as a safe haven.
I draw two conclusions from this.
First, the moves so far have been modest. Markets are not signalling a major disruption to the global economy.
Second, despite the frequent headlines predicting the end of the dollar’s dominance, the dollar remains the world’s primary safe haven currency during times of stress. The dollar has strengthened against all major world currencies since the initial bombings took place.
In times of uncertainty, headlines can feel overwhelming. But markets continuously process far more information than any single expert or forecast.
Prices reflect the collective judgement of millions of participants assessing the same risks in real time.
For investors, the implication is simple. Reacting emotionally to headlines rarely improves long term outcomes.
The market has already done the work.
Matthew Matthee has a wealth management business that specialises in retirement planning and investments. He writes about financial markets, investments, and investor psychology. He holds a Masters Degree in Economics from Stellenbosch University and a Post Graduate Diploma in Financial Planning from UFS. [email protected]
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