There is no doubt that the latest events in Iraq have caught both the media and investors by surprise. Over the last two weeks, a little known group, the Islamic State in Iraq and Syria, has overrun much of the country, facing little resistance from the Iraqi army. Unless the situation begins to reverse itself, there is a probability that Baghdad could fall into the hands of the militants in the next couple of weeks.
So how have the markets been reacting to an event that poses one of the biggest threats to world security, especially the oil supply? Surprisingly we have not seen much activity on the markets. There could be a number of possible reasons for this attitude among investors, especially with respects to emerging stocks that could take a hit from a dampening in economic prices.
The Russell 2000 index composed of some of the most attractive emerging stocks has not shown any signs of being affected by recent events in Iraq. In the last month, it has risen by a margin of 5 percent and on a year-over-year basis, it is up by 17 percent. Rather, investors seem to be more worried about what the Federal Reserve may decide in its next policy review.
Inflation fears and fall in the unemployment rate could trigger a rate increase although GDP growth is not yet on a sustainable path. Tightening of the monetary policy would also lead to money being withdrawn from the stock market as the era of easy liquidity comes to an end. Emerging stocks are likely to take a bigger hit as their shares prices were some of the biggest beneficiaries of the Federal Reserve's lax monetary policy.
Despite what might appear to be investor's indifference to the unrest in Iraq, which has wider regional implications, in the background investors are making some calculations on how best to react. The events in Iraq have caught many by surprise and stock market players need some time to digest this information. Hence, what is occurring now is a time lag before the actual hard decisions are made, and it is then we may be able to better assess the implications of this conflict on emerging stocks.
Should the conflict continue, it would definitely stifle the nascent economic recovery. High oil prices were some of the major contributors to the last great recession we saw in the 2008. However, for some emerging growth companies conflict is always a time to make money, irrespective of the ethical and moral issues involved. We might see a scramble for defence, and security linked stocks. Emerging growth stocks in the oil sector could also record some highs, although this is not very certain as oil prices are already trading at record highs.
The events taking place in Iraq are a cause for concern, but at the moment their impact is still limited as investors decide on how to react. While some emerging growth stocks are likely to be negatively affected, some stand to gain.