The situation in Iran does not improve, what should investors do?
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Markets are in decline, with no stocks showing signs of a turnaround
The model seeks to identify stocks that are showing signs of a turnaround following a downtrend, while also ranking among the top performers within the S&P 500 based on relative strength. However, the U.S. stock market has been sending uniform sell signals for two weeks, and since then, it has persistently maintained downward trends following reversal patterns. Numerous one-year uptrends have broken down, so it is not surprising that the model has not found any stocks that are poised for a reversal at this time. All of this clearly indicates that the markets are characterized by widespread selling pressure. The only difference may be that certain sectors could outperform in relative terms, meaning they fall less than the market as a whole.
International Markets - Technical Analysis
The declines that began two weeks ago have triggered strong sell signals in the markets. The uptrends that had been in place since last April’s low have been broken, accompanied by gaps and heavy trading volume. In such cases, it is generally expected that a correction will extend roughly halfway through the previous strong uptrend. For the S&P 500, this could mean a 14–15% drop from the peak. A similar correction is also likely in other U.S. indices. Among European stock markets, the DAX index’s uptrend was also capped by a strong sell-off two weeks ago and has been in a downtrend since then. The STOXX 600 is also pointing downward; while no strong sell-off patterns have appeared here, the uptrend has been broken. The index tracking emerging markets also turned two weeks ago and gave very strong long-term closing signals.
The week started with significant market movements, with oil prices briefly rising above $110 and stock markets falling by a further 1-2%, making market tensions palpable. There is no solution in sight to the war situation in Iran, and in fact, over the weekend, we moved even further away from one, with time currently working against investors. The longer the Strait of Hormuz remains closed, the longer energy prices will remain high, which increases inflation and growth risks. Considering the possible outcomes, we would like to draw attention to our recommendation regarding equity exposure in our 2026 Investment Outlook, namely that it is still worth keeping powder dry, i.e., maintaining liquid, cash-like exposure.
How surprising was the outbreak of war?
From an investor perspective, it did not come as a bolt from the blue, as US troop deployments had been underway in the region for weeks, and the fast successes in Venezuela may have increased the determination to act. However, the intensity of Iran's retaliatory strikes and the attacks on Gulf countries did come as a surprise. A week later, many may be surprised that there is still no sign of how the situation could be resolved.
Why is this war important?
Iran, and more broadly the entire Middle East region, which is being destabilized by the war, is a significant producer of crude oil and LNG, and, according to some estimates, a quarter to a third of the fertilizer trade passes through the relatively narrow Strait of Hormuz off the coast of Iran. In other words, if shipping traffic through the strait is obstructed and/or the oil and gas/LNG production and export infrastructure of Middle Eastern countries is damaged, this will also lead to a supply-side shortfall in the physical market. This drives up energy prices and, indirectly, agricultural prices, creating risks of inflation and slowing economic growth. The extent of these risks depends largely on how long this situation lasts.
How long could it last, and how could it end?
Over the weekend, we did not get any closer to a solution; in fact, the situation appears to be escalating further, with the election of the son of the ayatollah who was killed in the first days of the war in Iran as the supreme leader, whom the US considers unacceptable. This reduces the chances of the US resolving the situation through negotiations, and we are drifting towards a more protracted and uncontrollable situation.
- A "quick" (but this could take weeks) resolution could be facilitated by the fact that we are getting closer to the US midterm elections in the fall, and it is politically undesirable to be involved in a protracted war. The Gulf oil states are increasingly tense due to the destabilization of the region, and Iran's ally China also has no interest in escalation, as 14% of its oil imports come from Iran and another 37% from other Gulf countries. For the Iranians, the depletion of their stocks of weapons and ammunition used in the attacks could pave the way for agreements. However, even if a political agreement were to be reached and shipping traffic in the Strait of Hormuz were to resume, it would likely remain at risk of continuous attacks, which could have a negative impact on the volume, duration of transport, and cost of shipments, even in the long term (just as the attacks by Houthi rebels are having a lasting negative impact on shipping in the Red Sea).
- However, there are factors that call into question a quick solution, and in recent days the likelihood of this scenario has increased significantly: initially, there was hope for a quick settlement similar to that in Venezuela, but this would have required the emergence of a new leadership with whom the US would be willing to negotiate. This did not happen, and the election of Modzstaba Hámenei as supreme leader over the weekend only further reduces the chances of this, as the more extreme factions seem to have gained ground in the Revolutionary Guard, which is directing the Iranian attacks, and the strongly religious ideological conflict does not help to resolve the situation quickly. Politico reported last week, citing sources within the US government, that the war could drag on until September.
What could the market outcomes be?
The duration of the war, the level of attacks on energy facilities, the extent of the damage, and the navigability of the Strait of Hormuz will all shape the economic and market outcomes. As the likelihood of a prolonged conflict has increased in recent days, so too has the chance of a negative economic/market outcome, which investors will increasingly begin to price in over the coming days.
1. The most negative market outcome would be damage to energy infrastructure and a prolonged closure of the Strait of Hormuz for weeks, leading to a serious physical supply shortage in the oil and gas (LNG) market. The longer this situation persists, the higher oil and gas prices will rise, with Brent prices potentially reaching $150, which would create stronger growth and inflation risks for the global economy. At the national level, this could be partially offset by the release of strategic reserves.
From a market perspective, this could trigger stagflation, which is one of the most unpleasant outcomes from an investor's point of view (and one that is not yet fully priced in by the market), as major asset classes such as equities and longer-term bonds are both underperforming. Regional and sector winners can only be discussed in relative terms, as even relative winners that have performed well so far are likely to weaken in a general risk aversion environment. Commodities (primarily energy) could provide some refuge, and defensive sector exposure and cash-like exposures, particularly the dollar, could appreciate. A recent parallel can be drawn with the outbreak of the Russian-Ukrainian war and the year 2022, when even gold, which was initially strong, would not be able to perform well overall due to rising interest rate expectations.
2. In contrast, in the scenario referred to above as a "quick" resolution to the war, i.e., if oil and gas exports could resume through the strait within weeks, a sustained energy shock would be avoidable. In this case, extremely high energy prices would only persist for a short time, which would not have such a strong negative impact on the global economy (recession could also be avoided) as in the previous scenario. However, as damage has been caused to the energy infrastructure and the risk of transit through the strait would still remain for some time, increasing transport costs, energy prices would normalize at higher levels (a Brent price of USD 80-100 is conceivable for a period of several months) than before the war. The prolonged closure of the strait also poses a risk to the restoration of production, as if storage facilities become full due to the halt in exports, countries would be forced to shut down production, which would take a long time to restart even if the situation were to be resolved.
In this case, it is not a matter of general risk aversion, but rather the relative winners and losers could continue to outperform or underperform. This is what we are seeing at the moment, and the market is already pricing in this outcome. Net energy-importing regions are among the losers, such as the European and Central and Eastern European stock markets, or Asian countries that are also heavily dependent on oil and gas imports from the Middle East (such as Japan, India, South Korea, Taiwan, and even China). The winners are energy-self-sufficient regions such as the US or, among the emerging economies, Brazil. At the sector level, the more cyclical segments that are more sensitive to higher energy prices would underperform (e.g., tourism, aviation), but the energy sector, certain natural gas substitutes such as coal mines, fertilizer producers, and the defense industry could also receive a boost.
3. Although the likelihood of this has decreased significantly in light of the events of the past week there is still a scenario in which a credible solution to the situation in the Middle East could be found, which would be accompanied by a relatively rapid and complete recovery in raw material exports. In this case, regions and sectors that have been underperforming so far could rebound in line with the parallel decline in commodity prices.
Due to high stock market valuations and positioning, we recommended neutral equity exposure through 2026, with the option of increasing exposure during market downturns. Based on the scenarios outlined above, we believe this approach remains valid. Instead of excessive equity exposure, it is worth striving to have liquid cash-like resources at our disposal, which we would begin to use cautiously if the possibility of an agreement between the parties were to emerge. However, this has not happened yet, and we cannot rule out a negative economic outcome.
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