Iran
Many clients have asked us for an analysis of the long-term implications of the Hormuz Crisis. In this report, we posit that the conflict has been catalyzed by the multipolar context and that it will merely ossify the trends already afoot. Nothing offers incentives for more global capex like the threat of losing a critical energy supply chain. Therein lies the paradox. While capex is mildly inflationary in the short term, it is wildly disinflationary in the long term. This may be a worthwhile insight given all the consternation about long-dated bonds at the moment.
Last month we "stuck our neck out" and reaffirmed our bullishness towards risk asset. This month, we have confirmation that the risky bet is paying off. Iran and the US remain materially constrained from total war. The AI capex thesis is holding up and slowly mutating into a price war that will only boost adoption and necessitate more investment. We open a new AI-related trade (long hard disk makers) and go long gold.
Europe faces a difficult macro backdrop, but whether it slips into recession remains finely balanced. We present two perspectives before translating them into investment implications.
The Strait of Hormuz is a unique geographical feature. Other than the Bosporus and Dardanelles Straits that allow passage between the Mediterranean and the Black Sea (via the Sea of Marmara), there are very few other such, economically valuable, choke points. What many armchair geopolitical strategists consider “critical” naval routes – Strait of Malacca, Panama Canal, Suez – are really just pathways of convenience. “Nice to haves” – in that they significantly reduce sailing times – as opposed to the “must have” that is Hormuz.
In our last update on the Iran-US conflict, we noted that both sides in the conflict (all three, if we include Israel) were “coloring inside the lines.” By that we meant that they were abiding by the “red lines” of kinetic activity established in the heat of the first iteration of the Iran conflict. Specifically, we noted that investors should watch carefully for any sign that attacks were spreading beyond military facilities.
We stick to the view that geopolitical risk has peaked. The US and Iran tensions will increase oil prices, but below a level that will matter for the market. With global liquidity ample, private sector leverage low, and inflation peaking, bears are holding onto an epic collapse of the AI capex to short stocks. Eventually, the capex cycle will end in tears. That much history teaches us. But not yet.