Written by: George Prior
Recent attacks in the Red Sea, a crucial maritime route for global trade, could trigger a second wave of inflation in 2024, warns the CEO of one of the world’s largest independent financial advisory and asset management organisations.
The stark warning from deVere Group’s Nigel Green comes as UK and US forces launched an attack on Houthi targets in Yemen after the Iranian-backed group defied a warning to stop targeting ships in the Red Sea.
He says: “Recent attacks on ships navigating this critical route have heightened fears of disruptions to the global supply chain.
“Such disruptions could lead to delays, increased shipping costs, and potential shortages of goods, impacting economies worldwide.
“As global trade relies heavily on the efficient movement of goods through maritime routes, any disruption in the Red Sea could have far-reaching consequences.”
The deVere CEO continues: “The disruption of global trade in the Red Sea raises concerns about potential inflationary pressures.
“Disruptions to the supply chain typically lead to increased costs for transportation, production, and distribution, which may ultimately be passed on to consumers.
“If these disruptions persist, they could potentially trigger a second wave of inflation this year, which could pose challenges for central banks and policymakers globally.”
Prolonged Red Sea attacks are likely to disrupt the supply chain by delaying the transportation of goods, leading to shortages. “As demand outpaces supply, prices may rise, contributing to inflation. Industries heavily reliant on just-in-time inventory systems may be particularly vulnerable to such disruptions,” notes Nigel Green.
In addition, the uncertainty surrounding global trade can contribute to increased commodity prices, such as oil. “Higher energy costs can cascade through the supply chain, affecting various industries and adding inflationary pressures. This scenario may echo the oil shocks of the past, leading to broader economic consequences.”
The recent crisis in the Red Sea also highlights geopolitical tensions, which can further exacerbate inflationary concerns. Investors often seek safe-haven assets like gold and bonds during periods of geopolitical uncertainty, impacting their prices. “This shift in investor behaviour could have indirect effects on inflation dynamics.”
In the face of potential inflationary pressures stemming from longer-term Red Sea disruptions, global investors could find down the line that portfolio allocation strategies must be re-evaluated to navigate the uncertainties associated with geopolitical tensions, supply chain disruptions, and the broader economic impact.
Diversification remains a cornerstone of effective portfolio management. Investors may consider diversifying across asset classes to mitigate risks associated with specific regions or sectors affected by the Red Sea disruptions. Allocating to a mix of equities, bonds, and alternative investments can provide a more balanced and resilient portfolio.
“The recent attacks in the Red Sea have injected more uncertainty into the economic landscape, prompting fears of a second bout of global inflation if disruptions persist,” concludes Nigel Green.
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