We are hearing a lot of noise about the events in Iran this weekend. While this is certainly much more geopolitically substantial than the operation in Venezuela, the direct economic impacts are much the same.
If you remember, Venezuela represented +/- 0.10% of global GDP. Iran is a whopping 4x more productive, representing +/- 0.39% of global GDP. If you get froggy and try to account for their wildly volatile currency, the IMF more than doubles the value to 0.88%. Moreover, the vast majority of said GDP comes from oil exports, and nearly all of those exports are destined for China.
The moral of the story is that the immediate economic impact is marginal at best.
As we expand in the land of what-ifs, this conflict could have a wide range of impacts. The most obvious is already being seen with the IRGC launching drone and missile attacks at basically all of their neighbors that aren’t openly hostile to the United States. Many of these attacks have targeted US military bases, but a number of them have hit economic hubs and oil production facilities in Saudi Arabia, Qatar, UAE, and Iraq. The stated goal of these attacks was to force the neighboring governments to pressure the US to stand down.
Unfortunately for the Iranian regime, both Saudi Arabia and the Emirates are leaning toward actively joining the military campaign. The attacks on the oil production and transport in the region could cause increased volatility in oil prices over the short-term, but OPEC has already begun to increase production (almost like they knew something was going to happen in Iran). The challenge with trying to predict long-term movements in price is that we simply don’t know how long the conflict will last.
What should investors expect from all of this? First, oil prices will likely rise and stocks in the Middle East will be volatile as exchanges are forced to close for periods of time. It is fair to expect wild swings in travel-related stocks as flights and cruises are halted and restarted. The more missiles and drones that are used, create more orders that defense companies will have to fill to replace spent munitions. Oil producing countries outside of the region have traditionally benefitted from Middle East tensions simply because they don’t ship anything through the Strait of Hormuz. Finally, safe-haven trades are a common landing spot for investors during periods of heightened geopolitical unrest.
If we use history as a guide, US stocks rallied after we invaded Iraq; however, stocks were cheap coming out of the dot-com bubble. As we live and breathe, you would be hard pressed to find someone that says US stocks are cheap, but you have to remember that even expensive stocks can get more expensive.
We will provide additional updates as the situation unfolds.
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