- Geopolitical Strategist
Asia ex-Japan, Institutional
Change
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The scenario playing out between Israel and Iran remains the most likely path to a wider conflict that would matter to markets. My usual advice in situations like this remains the same: These are highly fluid geopolitical developments and are therefore rife with incomplete information and, in some cases, misinformation. In such a challenging information environment, exercise extreme caution and patience regarding the veracity of events while at the same time expanding your imagination about a wider set of potential outcomes and what those outcomes could mean to portfolio exposures and investment strategies.
I’ve moved my base case of a wider regional war to 45% (up from the historically high 35% prior to Iran’s missile launch). So, essentially, I believe this is now a coin flip and therefore demands wider portfolio attention. While I remain hopeful on the margin that US military deterrence and clear/aggressive diplomacy toward Iran and Israel can keep this conflict under relative control, the situation continues to escalate and each development brings a new set of uncertainties.
Here are two uncertainties I’m watching closely from here:
- The timing, scale, and scope of any Israeli military response — especially if the response includes direct US military involvement. The US has significant firepower in the area, including the Abraham Lincoln and Harry S. Truman aircraft carriers (in addition to other significant naval and air power assets), as well as 40,000 troops.
- Given that Iran’s attack featured more than 100 ballistic missiles aimed at civilian areas, it’s easy to imagine a significant Israeli military response — and as of this writing, Israel had already vowed retaliation. This could include attacks on Iranian military infrastructure, leadership, and nuclear facilities. From a market standpoint, a lower-probability/higher-impact event would be direct attacks on Iranian oil infrastructure aimed at crippling Tehran’s economic capacity.
As for the bigger-picture investment implications, my larger and most important point remains the same: Iran’s attack on Israel is yet another indication that the geopolitical backdrop remains the most dangerous, unstable, and unpredictable environment in decades. In such conditions, world leaders are more likely to take greater policy risks if they believe core national security issues are at stake (true here for both Israel and Iran). From an investment perspective, this structurally higher geopolitical risk continues to force policymakers around the world, including on Capitol Hill, to prioritize national security issues, sometimes at the expense of economic efficiency, which should support long-term national security themes including legacy defense, defense innovation, and climate adaptation/resilience.
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Monthly Market Review — August 2024
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Brett Hinds
Jameson Dunn