Markets Brief: For Iran War Impact on Oil and Other Markets, Longevity and Strait of Hormuz Are Key

With the attacks by the United States and Israel on Iran, and Iran’s retaliatory strikes, investors are once again having to navigate a wave of geopolitical uncertainty.

Beyond the human toll of the war, for now all eyes in the markets are on oil prices, and more specifically on the Strait of Hormuz.

“The main transmission channel of the Iran crisis to the global economy and macro markets is its impact on energy markets, with the combination of severity and expected longevity key,” analysts at Goldman Sachs wrote Sunday.

When it comes to oil prices, the key variable in this war is shipping traffic through the Strait of Hormuz. Here’s more of what Goldman’s energy team had to say:

“Tanker traffic through the Strait of Hormuz–through which normally 1/5 of global supply for both oil and (liquefied natural gas) flows–appears significantly disrupted as many shippers, oil producers, and insurers have shifted to a cautious wait-and-see mode amidst reports about damaged ships.

Based on the 15% weekend gain in retail prices, we estimate an $18/bbl real-time risk premium in crude oil prices, which corresponds approximately to our estimate of the fair value effect of a six-week full halt in Strait of Hormuz flows (allowing for spare pipeline capacity use as a partial offset). This estimated impact moderates to +$4 if only 50% of the flows are halted for one month.

If the disruption lasted ¼ of a month, the hit to production would likely be very small as producers would likely continue to store oil on land, and delay rather than significantly cut cumulative exports. Moreover, producers such as Saudi Arabia have precautiously increased exports and production ahead of the escalation.

In contrast, if oil were to be trapped for four months in the region and because inventories can’t draw persistently, oil prices would likely rise disproportionately to balance the market via price-driven demand destruction and refinery run cuts.”

When it comes to other markets, Goldman’s analysts again say it will come down to the size of any oil shock.

“In equities, the impact of a risk and growth shock is clearly negative, but only a severe and sustained oil price disruption (as in 1990 or 2022, for instance) would have large effects on the global growth picture,” they wrote. In that scenario, the Goldman team highlighted cyclical sectors is most likely to be under pressure, “particularly consumer-facing areas, including airlines, and industrial oil users. Energy producers should outperform.”

“For rates, the tension between inflation upside and growth downside of a negative supply shock will be key to the response,” they wrote.

Playing Offense With Defensive Stocks

In November, Morningstar’s Leslie Norton spoke with Rajiv Jain, chair and chief investment officer at GQG Partners. He maintained that the stock market’s artificial intelligence boom is a bubble—“dot-com on steroids.” At the time, the performance of Jain’s funds had fallen far behind, clients were worried, and his was a Chicken Little voice on Wall Street. We may not have seen a bubble burst over the last few months, but Jain’s pivot away from tech was prescient.

Where is GQG finding opportunities? The firm’s most recent research report, “Is Defensive the New Offensive?,” offers its views on the types of stocks and the individual names they find attractive: “Defensive stocks offer steady growth, high visibility, and attractive returns through dividends and buybacks, making them resilient investments often overlooked by the market.”

Though defensive stocks aren’t as flashy as high-growth names like Nvidia NVDA or early-stage software businesses, their growth is “consistent and almost formulaic,” according to GQG. The report mentions utilities like Duke Energy DUK, grocery chain Kroger KR, and insurance company Allstate ALL—all of which provide goods and services that consumers will keep paying for even during downturns.

The firm is also favoring European defensive stocks, including household names like Unilever UL and British American Tobacco BTI. “While most people pay for and would pay more for auto insurance—even if rates increase or they lose their job—very few pay for ChatGPT, and far fewer would pay more if its price went up," wrote GQG.

February Jobs Data Ahead

Most of earnings season is now behind us, and with the start of a new month, the focus will shift back to key economic data, starting with Friday’s release of the February jobs report. The January report surprised economists with its strength in hiring, showing the US economy adding 130,000 jobs. That was well above expectations, and more importantly, it marked a shift from the fourth quarter, when the three-month rolling average for hiring was negative.

For the February report, economists forecast some moderation in jobs growth, with nonfarm payroll employment expected to rise by 60,000. With all the uncertainty in the stock market around the impact of AI, the resiliency of the economy has been a tailwind for equities. Analysts will be watching closely to see if there is any wavering in that support.