Recent military actions have seen the United States and Israel launch a series of airstrikes against Iran on February 28. The objective of these strikes was to destroy Iran's leadership, nuclear facilities, ballistic missile sites, and other military infrastructure. By targeting the political leadership, Washington aims to instigate a regime change in Tehran.
It has been confirmed that Iran's Supreme Leader Ayatollah Ali Khamenei was killed in the attacks, alongside multiple senior Iranian officials who were either killed or severely injured. An advisor to the Supreme Leader, Larijani, stated that Iran will establish an interim leadership committee, although the succession plan for the government remains unclear.
In response, Iran has launched multiple rounds of retaliatory strikes against nine neighboring countries hosting US military facilities, including Israel, the UAE, Kuwait, Saudi Arabia, Bahrain, Jordan, Qatar, and Oman, causing significant disruptions to air traffic.
In recent years, Iran's direct impact on global energy supply has not been substantial. Iran accounts for approximately 3% of global crude oil production, with exports primarily directed towards China. Should Iran's output be constrained, other oil-producing nations possess sufficient spare capacity to offset the shortfall. However, Iran holds military influence over the Strait of Hormuz, through which about 20% of the world's crude oil and refined products are transported to importers globally, particularly in Asia.
Iran has historically avoided blockading the strait, partly because a significant portion of its own crude exports also transit this route. Closing this strategic chokepoint could sever a vital source of government revenue.
J.P. Morgan Asset Management suggests that the potential impact on global energy prices will depend on the duration of the military conflict and the extent of disruption to worldwide energy supplies.
The effect of recent military conflicts on energy prices has varied. For instance, following the onset of the Russia-Ukraine war, Brent crude prices surged from $98 to $128 per barrel in less than a month, a 31% increase. At that time, Russia accounted for 12% of global crude production.
In the short term, energy markets may price in a higher risk premium amid elevated uncertainty. Concurrently, rising crude oil prices could also drive up food prices, as fossil fuels are both a raw material for fertilizers and directly impact transportation costs, creating a strong correlation between food and energy prices.
Persistent energy supply disruptions could lead to a global inflationary increase due to supply shocks. This would pose challenges for central banks in developed economies, as raising interest rates is an ineffective tool for countering fuel and food price inflation. Rising inflation reduces disposable income, potentially further weakening consumer spending. For some emerging markets, particularly those with current account deficits that are net oil importers, central banks may have little choice but to raise interest rates to maintain currency stability. Historically, India and Indonesia have been more vulnerable in such environments.
From an economic growth perspective, Japan, South Korea, Taiwan (China), and India are highly dependent on imported crude oil to support their economic activities. While they do not import crude directly from Iran, a prolonged blockade of the Strait of Hormuz would severely impact their energy supplies.
J.P. Morgan Asset Management believes assets that could hedge against the current risks include equities in the energy sector, particularly upstream exploration and production companies, as well as listed defense companies. Government bonds from developed markets (with short durations) and gold are also considered traditional safe-haven assets. In the foreign exchange market, safe-haven currencies such as the Swiss Franc and the Japanese Yen may find support.
Nevertheless, it is important to recognize that such geopolitical events typically only exert a temporary influence on markets. Over the long term, a diversified portfolio comprising equities, bonds, and alternative assets remains conducive to helping investors outperform cash. Therefore, despite the influx of headlines expected in the coming days and weeks, maintaining investment positions may still be crucial for long-term investment strategies.
The above information does not constitute investment advice, or an offer or solicitation to purchase any securities, investment products, or services. The presented data is sourced from information believed to be reliable, but verification is recommended. Investing involves risks; different asset classes carry different risk characteristics, and past performance is not indicative of future results. Please refer to the relevant offering documents for details, including risk factors. Views and forecasts are current as of the date of writing and are subject to change.