Market Musings 080326: In the Fog of War

Market Musings 080326: In the Fog of War

Report and Video: Investment Strategy Focus March 2026
Heavy Assets in Vogue

The HALO (Heavy Assets, Low Obsolescence) effect: the prevailing theme in the stock market at present is the rotation away from digital assets back towards physical assets. Investors have begun to favour companies and industries where the risk of AI disruption is low to none. Positive on Mining, Building & Construction.

Iran and the Strait of Hormuz: In the Danger Zone

With the Brent crude oil price surging to above $90 per barrel by the end of last week due to the effective closure of the Strait of Hormuz to shipping, the global economy is entering the danger zone.

It is hard to overstate the importance of this narrow body of water between Iran and the Arab states to the rest of the world. 20% of global oil supply and close to 20% of the world’s Liquefied Natural Gas supply passes through the Strait. But it is not just about raw energy supply but also about supply of other essential products linked to energy, such as urea which is the base for nitrogen fertilisers. Over 30% of the world’s urea supply passes through the Strait.

In short, the longer that the Iranian conflict continues and the longer that the Strait of Hormuz remains effectively closed to seaborne traffic, the greater the risk that oil prices exceed $100 and that the world economy goes into recession. For this worst case to materialise, the oil price would need to remain elevated (c. $100 or higher) for a number of months.

In 2022, the outbreak of war in Ukraine drove the Brent crude benchmark oil price above $100 from the beginning of March until August, triggering a huge surge in global inflation rates and triggering a multi-month bear market in stocks.

The cure for low prices is low prices, and the cure for high prices is high prices

This is an oft-repeated mantra in commodities. In the case of the oil market, it means that the higher the price goes (and stays), the more likely it becomes that the oil price will eventually decline. This is for two reasons:

1. High sustained prices incentivise oil-producing countries/companies to invest to produce more, thus rebalancing global supply and demand over time and bringing prices back down from elevated levels; and

2. If oil prices stay high enough for long enough, there is demand destruction as the global economy sees slower growth (oil and gas can be seen as an energy tax on the global economy) or even recession, reducing demand for oil and oil products.

When does this demand destruction begin? Typically when the oil price stays above $100/barrel for a number of months. This was particularly evident in 2008, adding to the pressures on the world economy from the Global Financial Crisis.

A War of Attrition?

At this point, the risk that this turns into a prolonged conflict seems to be rising by the day. Thus the risk of even higher oil prices triggering a global recession is also rising.

What are the strategies of Iran and of the US? Does the US even have a clearly-defined strategy?

The Iranian strategy seems clear - to outlast the US and Israel, inflicting enough pain on US allies in the Gulf and on the global economy via the throttling of seaborne traffic through the Strait of Hormuz to make the US blink and de-escalate.

But the US strategy is far less clear. Were they really targeting regime change in Iran, which seems a pretty unachievable objective given a) the unwillingness of the Trump administration to commit ground troops to this conflict, and b) the tight grip that the Iranian religious leadership have on the country and the lack of an effective, unified opposition

Was the aim rather to neuter Iran’s nuclear weapon and ballistic missile capability for good? Or was the ultimate aim more nefarious, to eventually control Iranian oil production via the capture of Kharg Island, where much of Iranian refinery capacity sits and through which 90% of Iranian oil exports pass? Add this control to US control of Venezuelan oil production and to US domestic oil & gas production (the USA today produces as much as Saudi Arabia and Russia combined), and this would give the US far more control over global oil & gas supply than the OPEC cartel of oil-producing nations enjoy today.

Pressure on the US is growing

Pressure on Iran may be growing, coming from China who are by far the biggest customers for Iranian oil exports. But the greater pressure must be on the Trump administration in the US, both from the Gulf states who are suffering heavy collateral damage to their economies and also from rising domestic pressures as oil prices rise and squeeze US households ahead of November’s mid-term elections. The chart below underlines the huge surge in US gasoline prices since the start of this conflict, reducing the purchasing power of the average American household.

This is clearly not a great way for the sitting administration to win votes - note that Trump’s domestic approval rating remains far lower today than at the equivalent point during Trump’s first term. Moreover, it continues to decline, rather than improve. This would suggest that the Republican party is at great risk of losing control of at least the House of Representatives to the Democrats, which would then render Trump potentially a lame duck president, unable to pass laws through Congress.

Source; The Economist

Will Trump blink soon?

Of course I and others in the financial markets hope so, as we would all like to see de-escalation of this conflict as soon as possible. But hope is not an investment strategy.

Stock market volatility has also spiked to high levels, reflecting widespread fear over the geopolitical uncertainty and the rising risk of recession. I think there is a good chance that President Trump will soon declare victory (whatever that means) and begin to withdraw forces from the Gulf.

But the real question is whether, even in this eventuality, will the Iranians allow the Strait of Hormuz to reopen to seaborne traffic?

All in all, it is too early to invest on the belief that we see de-escalation sooner rather than later. I believe that the financial markets are still largely pricing this eventuality, and underpricing the tail risk that the conflict drags on for far longer, with oil prices continuing to rise, triggering stagflation via the combination of higher inflation and weaker global growth. If financial markets were properly pricing this risk, then the gold price would be far higher and global stock markets would have fallen further than they have, so far.

Conclusions: What to do now

The themes I think that one can invest in today, whether the current conflict is prolonged or not, are the following:

• Fertiliser production, both from nitrogen and from potash

• OIl Equipment & Services companies

• Companies involved intimately in electronic defence and drone technology

• Copper, rare earth metals and key defence-related metals such as Tungsten

These sectors should benefit in the medium- to long-term whether conflict cools soon or not.

One should also prepare a potential buy list of opportunities to action IF the US do decide to “declare victory” and de-escalate the conflict, AND if ships begin to pass through the Strait of Hormuz once again.

This list could include sectors that are currently being hard hit, including Travel & Leisure (e.g. airlines), Emerging Market stocks, European banks and energy-intensive Chemicals and Basic Materials.

Again, the idea is to prepare the shopping list but not to put it into action until de-escalation is clear.

Fingers crossed,

Edmund