US, Iran and Preparation vs Prediction | Weekly Market Update

One thing you (slowly) learn doing this job is that preparation adds more value than prediction. My update on Iran is below but I would caution that the range of possible outcomes remains wide and the basic issue of what Iran can and will do over the next 6 months remains essentially unknowable.

So if, as ever, prediction remains hard, then that leaves preparation. On this I have two useful things to say. First, the US dollar and US technology stocks have again proved defensive to an energy driven growth shock. Whatever you think of AI, it will keep marching ahead whatever happens to oil and equity diversification is still delivering value to investors. Second, we did not go into this running particularly high levels of risk and when reviewing performance, as I have been doing this week, nothing has looked out of line when compared to our risk limits (so far).

With that out of the way, here are my thoughts on where we are with US/Iran:

• The Strait of Hormuz is all that matters for markets. There are plenty of scenarios for where Iran goes from here but from a market perspective what happens in the Strait of Hormuz is what counts. Around 20% of global oil consumption travels through Hormuz with most of it going to Asia and China. And, just as importantly, around 20% of the world’s liquified natural gas (LNG) trade also passes through the Strait. This is the LNG that was supposed to start arriving in size in Europe this year.

 

• Over the past 40 years there have been 21 US airstrike campaigns in the Middle East and US equity markets have been higher 8 weeks later 95% of the time¹. This kind of muscle memory might be a reason the US S&P 500 equity market is down only -3% for March in US Dollars (and -1.7% for sterling investors). It is true that ex-US equity markets that are more geared to the global economy have taken a bigger hit. But even emerging markets, which are down -7.4% since the war began in sterling terms, are still +5.6% for the year so far. There are no guarantees, but it has paid off for investors to look through geopolitical shocks over a medium-term time horizon.

 

• The US playbook looks pretty clear. At some point, not far from now, Trump will declare victory and move on to his next self-created crisis. Trump was elected on a platform of removing the US from pointless wars and bringing down inflation. Epic Fury is, of course, the exact opposite. Higher petrol prices will not be a vote winner in the mid-terms. Trump needs less war and lower energy prices pretty quickly.

 

• The big problem is that no one knows what Iran is going to do. And note that Iran has a strong incentive to cause trouble for the US, if only to raise the cost of any future attacks. With direct physical attacks on the US off the table, the main method of warfare is economic. Drones, small boats and mines are all low cost, hard to detect and effective. A prolonged closure will mean (much) higher energy prices, higher inflation and a slower global economy. And higher oil prices are a boon for Russia, its long-time ally.

 

• The market is telling you it is getting worse not better right now. If the Strait of Hormuz is what matters, the Brent spot oil price is the window into whether or not the situation is getting better. At a price of $101 for Brent we are off Monday’s highs but we are still above the $80 or so oil price we saw last week and oil has been climbing since Tuesday. The oil market is not optimistic that Iran will stop fighting when the US declares victory.

 

• Longer term, one way or another the market still expects this to be resolved. My evidence for this is the futures chart below which compares the oil futures curve today with 1 month ago. But there is an Iran risk premium in oil prices that did not exist before the war broke out. As an example, here is the Brent futures curve today vs 1 month ago.

• But if this chart is right (another) inflationary shock is on the way. Oil is currently expected to be above $85 in October 2026. And the oil market is currently well stocked for a supply disruption. LNG has less in storage (as it is harder to store) and is similarly affected which will, I am afraid, affect all our heating bills. As with Tariffs in 2025 an inflation shock is on the way. And with inflation currently (a little) above target those rate cuts that were supposed to support the global economy in 2026 are probably not going to arrive.

 

• That said, resilience has been a theme of the global economy recently. If the actions of Iran and the future of the Strait of Hormuz are essentially unknowable then one comfort I can offer you is that the global economy has proved pretty resilient recently. Trump’s tariffs ultimately didn’t do much to slow the global economy. And 2022 saw the Russia/Ukraine war trigger a similar energy price shock just as the economy was wrestling with post Covid inflation and interest rates jumping from 0% to 5%. The global recession (almost) everyone predicted never actually turned up.

 

• And for those worried about the 1970s returning, I’d note that amount of oil needed to produce one unit of GDP has more than halved since the 1970s, according to the World Bank. This means the impact of oil price shocks should be lower today. Higher energy costs are a tax we will all have to pay but, at the risk of drifting back into prediction, they are not necessarily life threatening to the global economy.

Thanks to the Goldman Sach Investment Strategy Group for that stat.

 

Chris Brown, CIO

cbrown@ipscap.com

The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.