Financial Panorama

A global pandemic, the war in Ukraine, and rising protectionism: these events have helped reshape the economic and geopolitical landscape, in addition to altering international trade. The current conflict in Iran clearly demonstrates the need for various economies to adapt to new and complex challenges.

Negotiations to end hostilities are crucial to reducing the current insecurity, as the United States has no interest in getting bogged down in an endless war. The situation is also critical for China, which is seeking to stabilize its oil supplies, and for the Gulf countries, which do not want to tarnish their reputation as a premier tourist destination—a status that provides their respective economies with valuable diversification.

It is important to keep in mind that history regularly demonstrates the resilience of economies and markets in the face of adversity. Rest assured that we remain vigilant in our analyses in order to accurately assess the impact and repercussions of the current situation, while maintaining a disciplined management approach.

Course and consequences of the conflict

The war is now in its sixth week, and the last oil tankers that left the Strait of Hormuz before hostilities began have reached their destinations. At the same time, the effects of oil shortages are also beginning to be felt in various countries.

On April 8, the announcement of a two-week ceasefire agreement between the United States and Iran, coupled with the reopening of the Strait of Hormuz to oil tanker traffic, should provide some respite and allow for an improvement—even if only temporary—in the situation. A ten-point proposal is on the table for negotiation: the coming days will determine the course or resolution of the conflict.

An escalation of hostilities could lead to significant destruction of oil and gas infrastructure in the Middle East. Already, Qatar has announced that it will take three to five years of work for nearly 17% of its liquefied natural gas production to return to pre-war levels. Added to this is the restoration of aluminum production plants that were also affected by the Iranian strikes.

The closure of the Strait of Hormuz, in addition to its negative impact on oil and gas prices, has also affected fertilizer production and even the production of helium, which is required in particular for the manufacture of microprocessors and is therefore essential for the deployment of artificial intelligence. Among its many other uses, helium is used to cool magnetic resonance imaging (MRI) machines.

In recent days, following the recommendations of the International Energy Agency (IEA), some countries have begun asking their citizens to reduce their gasoline consumption and use more electricity. Schools have been closed, and remote work is once again being recommended for certain categories of workers.

Pipeline to the rescue

On a more positive note, Saudi Arabia has significantly increased the amount of oil transported through its East-West pipeline, which carries crude to a port on the Red Sea. According to available data, seven million barrels per day now pass through it, compared to an average of one million barrels before the conflict. Considering that twenty million barrels of oil were previously transported by ship through the Strait of Hormuz, this increase should help limit the surge in oil prices.

Of course, Saudi Arabia’s increased use of the pipeline is not without risk, as Iran has already attacked Saudi facilities, and the Houthis, a militia allied with Iran, are threatening ships passing through the Red Sea.

The domino effect of shortages

The reopening of the Strait of Hormuz is a priority for global trade. The longer the blockade lasts, the more fears of sustained inflation are felt. For example, higher prices for fertilizers and diesel will undoubtedly impact food costs, which in turn will lead to worker demands for wage increases to offset the price hikes.

A context of high and sustained inflation leading to a sharp economic slowdown could foster the emergence of stagflation, defined as rising prices without corresponding economic growth and accompanied by job losses of varying severity.

Direct impact of the war in Iran

On the U.S. economy

Since its election, the Republican administration has been seeking to reduce inflation so that, in turn, the U.S. Federal Reserve (Fed) will announce a cut in its policy rates. It wants to drive down the value of the U.S. dollar in order to boost exports and bring manufacturing back to the United States. By increasing oil production, it also aims to lower the price of gasoline at the pump.

The conflict in Iran introduces elements of instability that run completely counter to all of these trends and could seriously harm the Republican Party in the midterm elections this coming November. This pressure and voter dissatisfaction are pushing the administration to seek a resolution to this war sooner rather than later.

The case of China

China maintains close ties with the Gulf states and with Iran, in addition to being a major importer of oil from this region. It therefore wants a swift end to the war and has offered its assistance to Pakistan, which appears well-positioned to play the role of mediator between the United States and Iran and which, moreover, contributed to the ceasefire agreement. A rise in the costs of oil, gas, and their derivatives is negative for China and the countries of Southeast Asia, which are major exporters and for whom the current situation portends a significant increase in their production costs.

Elsewhere in the world

Europe is experiencing its second energy crisis in just a few years, but it appears that the recent increase in production from renewable energy sources is mitigating this impact. Nevertheless, hydrocarbons and molecules extracted from natural gas are used in the manufacture of a wide range of products, such as nitrile surgical gloves produced in Thailand (45% of global production), whose manufacturers are now seeking government assistance, as well as various medical devices whose components are made of plastic.

Beyond the current conflict…

Growing sectors

Military spending – From an investment perspective, overall military spending will continue to rise, as the United States seeks to compel NATO members to increase their spending to meet specified quotas. The events of the past fifteen months are also prompting most countries to take charge of defending their own territory.

Energy spending – These expenditures will also rise, as the production of all forms of energy—whether renewable or not (including nuclear)—will be considered essential to national security.

Government spending – Maintaining this national security will necessarily lead to additional demand for metals and energy, and will certainly entail more substantial government spending. In this context, countries that have the capacity to significantly increase their productivity will come out on top.

Stock market conditions

Following the announcement of the ceasefire agreement, stock markets were on the rise, anticipating a rapid resolution of the conflict, which would imply a temporary inflationary impact and rising costs that could be absorbed by industries and consumers.

In the event of a protracted conflict, corporate earnings will be revised downward and interest rates will rise, which will lower the multiples investors are willing to pay and likely lead to a further decline in the markets.

Central banks and policy rates

From the perspective of central banks, a shock caused by oil prices is a difficult scenario to manage. Its immediate consequence is a slowdown in economic growth, as the price of gasoline acts as a direct tax on consumers, who consequently have less money to spend elsewhere. However, it should be considered that this is also a tax that increases the prices of other goods, particularly their production and transportation costs.

In such a context, price stability is difficult to maintain. Raising policy rates would then have the effect of further reducing economic growth. Central banks will therefore remain on hold for as long as possible, hoping for a swift resolution of the conflict…

In conclusion

Despite the prevailing uncertainty, it is essential to remember, as an investor, the importance of not deviating from your investment strategy. Hasty reactions are always inadvisable, and the current situation is evolving rapidly. If you have concerns, discuss them first with your advisor: this will enable you to make informed decisions and put events into perspective.