Syria Strike: Market Implications

Summary

• The US, Britain and France have launched missiles at Syria.
• This strike has been widely anticipated.
• What does it mean for markets?
• Can we protect ourselves with certain trades?

Friday Night the US, Britain and France launched missiles at three Syrian targets. The targets were all tied to the use or manufacturing of chemical weapons and is intended as a counter strike because allegedly Syrian President Assad deployed chemical weapons against rebels within Syria.

source: wsj

Reviewing U.S. and British new sources it is apparent the coalition wants to send the message:

1. The strikes happened because of the use of chemical weapons
2. The strikes were carried out carefully with the intent to avoid accidental deaths and collateral damage to civilians, Russians or Iranians.
3. No further escalation seems to be desired.

In my view nothing surprising has happened. Also read: Here come the rockets. If the above official story holds up, as it gets scrutinized and we will get to hear the side of the story from Russian, Iranian, Syrian and independent media, I don't see it affecting markets much beyond a potential hundred to two hundred point sell-off.

The impact of the event can grow if it turns out Russian or Iranian targets have been struck. Another way for the market to take it badly would be if there's an actual response by Russians, Iranians or Syria itself.

The WSJ has Anatoly Antonov, Russia’s ambassador to the U.S., as stating:

We warned that such actions will not be left without consequences. All responsibility for them rests with Washington, London and Paris. Insulting the president of Russia is unacceptable and inadmissible.

A statement that's quite political in that it sounds pretty grave but you can take it to mean nothing as well.

The WSJ also has the Iran’s foreign ministry stating there will be

consequences and repercussions for this adventurism

Trades

In m previous article I wrote:

I'm not at all confident about "trades" in response to airstrikes. However, it seems obvious we are moving into a moment in time when there's the potential for tremendous volatility. Gold is another asset I already favor because of inflation-related considerations. It seems like an interesting trade to keep gold near the top end of the range one is comfortable with.

Convenient ways to gain exposure to gold are through the SPDR Gold Shares (NYSEARCA:GLD) or the iShares Gold Trust (NYSEARCA:IAU).

GLD Price data by YCharts

A controversial alternative I'd like to add is to buy some Russian ETF's provided there's no major escalation of the conflict before Monday. Some of the larger ETF's are the:

1. VanEck Vectors Russia ETF (BATS:RSX)
2. iShares MSCI Russia ETF (ERUS)

The portfolios have differences but both have enormous exposure to oil & gas. Energy makes up respectively 43% and 46% of these ETF's. Oil prices have gone up likely in part due to geopolitical tensions:

^SG2A data by YCharts

While the ETF's declined in price quite a bit:

RSX Price data by YCharts

If you add to that the fundamentals are quite attractive it becomes a very interesting trade on almost any timeframe. If you look at the table below, containing Morningstar data, you will see the fundamental valuation metrics for the VanEck Vectors Russia ETF including a 7.5x forward earnings multiple and a 5x cash flow multiple.

A long like that won't work out very well if the conflict escalates but the 7%+ dividend bails one out over longer holding periods. It seems to me if it doesn't work out neither would a long position in the S&P 500. This leads me to believe it could be interesting to trade some S&P 500 equivalent exposure for a mix of gold/long Russia instead. If the conflict escalates the gold could work out very well. If the conflict escalates (without Russian involvement) the long Russia position should work because of the energy component. If the conflict doesn't escalate the S&P 500 could work out (but I'm not holding by breath giving valuations) and the long Russia could work out. The long Russia is looking better due to the better fundamentals. I have some Russian exposure through an actively managed closed-end fund.

Analyst’s Disclosure: I am/we are long IAU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.