Geopolitics in Motion: How the Iran Conflict Is Moving Markets

Transcript

PETER HOFSTRA:  Hey, good day.  What a world, hey?  Pete Hofstra here with an update on North American Equities.  It's March 2nd, 2026.  Going into the weekend I thought we'd be talking about such mundane things as the collapse in software, how the volatility within the market is so much greater than the volatility of the market.  Maybe talk about things like the State of the Disunion address from President Trump, but of course all that takes a back seat as the US and Israelis had a coordinated strike against Iran, which is ongoing.  So, maybe we start with the more benign things just to make sure we're adjusting to some of these things.  I mean, the State of the Disunion, we'll leave that alone, consequence will come out of that.  Obviously positioning for the mid-terms later this year and with regard to certainly software and the AI disruption.  You know, we always encourage our team to think three years out -- how are we going to make the most return over the next three years?  So, when you're starting to see this volatility there's definitely opportunities and you want to find the right balance between acknowledging AI is disruptive, but where is it disruptive?  What is it really capable of?  Is there things being significantly oversold?  And we would submit yes.  It's not everywhere, but there are things being thrown out with the bathwater and to make it even cheaper given the increased uncertainty associated with the strikes against Iran.  So, certainly opportunities within software and we'll have time to address that as this concern over AI isn't going to go away overnight, but over the next few quarters that will certainly play out in who the long-term winners are going to be and who the disruptees are going to be.  And doing a lot of work to try to get in front of a lot of that.  So, more to come there. But let's talk about what went on over the weekend starting on Saturday.  So yes, end of February, a few things.  This is somewhat telegraphed.  Timing is always a bit of a surprise and it's always a bit shocking to see this sort of level of escalation to a very intense military strike.  Where things translate from, say, these extreme events to what hits the market ultimately comes down to interest rates, right?  Again, we always say the most important number in the financial world is short-term US interest rates, which is a decision and that decision impacts the pricing of everything but is impacted obviously by inflation and then in some cases the state of the economy.  The US Central Bank has to do a mandate and so when you think about Iran, obviously a big oil producer but probably more importantly the Strait of Hormuz.  20 percent, close to 20 percent of the worlds oil travels through that chokepoint and so we're seeing big shipping companies saying we're done.  We're not even going to try to go through there.  We can't afford the insurance.  So, that's critical.  You see the Qataris have said they're going to cease production on a liquid natural gas powerplant, so that will certainly impact natural gas prices within Europe.  So, certainly the spillover effects could be inflationary.  The question is, is this temporary or is their risk of this becoming more permanent?  And I think what you're seeing is there is a spike in oil, but frankly it's mild.  I think the market at this point is betting that this is somewhat transient and that cooler heads will prevail and we need the oil markets to work.  Obviously the longer this conflict goes on the greater that risk would be.  But you think that crude got over $120 when Russia went into the Ukraine, so back in 2022.  So, we're certainly nowhere near those levels but a bit of a risk premium coming in this morning.  So, it's certainly something we're going to keep a close eye on.  I want to give a shout out to some of our team members.  Curtis Gillis, who covers energy, runs a resource fund.  I was busy over the weekend.  It was Lauren Gabsby who heads our macro team, sort of indicating what the implications would be.  But that's sort of there's going to be a more permanent lasting impact from this that will be felt through inflation and the interest rate response to that.  Again, the world's awash in oil and fossil fuels, but there's always a chokepoint and short-term concerns.  So, likely that gets resolved and that's what we're seeing priced in.  Maybe the greater risk, frankly, is we know the market hates uncertainty and you always think that can sort of be unwound, but this could create a number of consequences from a relational standpoint and a world that is certain to remap itself by way of trade relationships, trade routes.  If the Iranians decide to strike back and this could get extreme, right?  Either hitting the US and Israel as best they can or allies of the US and Israel either in the region or outside the region, that's certainly going to create anger and frustration of those that are being subject to strikes and where is that anger, frustration directed?  At the US for initiating this conflict?  Or at Iran for and the past regime, for behaving in sort of a vengeful way and going after anything and anyone they can hit?  But if you think about if this was a bilateral agreement between the US and Israelis to go in, did they coordinate effectively or protect others in the region sufficiently?  So, are they going see that support?  So, certainly the relational impact from this is important. That can create uncertainty within the market.  Ideally a deal is struck and keep in mind President Trump is a very different president. He doesn't care intrinsically about the philosophical regime change or functional. He doesn't care what the system of government might be in Iran.  He just wants a compliant government, one that where the US, once it can get their way.  It's a big extreme but certainly can have a functional partner.  And Venezuela is sort of that case study.  He wasn't looking to bring in a democracy.  Again I'm not even sure he respects his own democracy, but he wants a government obviously that he can work with, that can serve the US interests well.  So, again I think a deal is possible; he's very transactional.  It's like we're happy to work with you; you can stay, some version of the regime, stay in power; you just need to be compliant.  And I think in both cases, Venezuela and Iran, which we do know is there was internally mass anxiety, anger toward the governing party.  The system of government, the individual who was at the head.  And so there's opportunity to hear, to build trusted partners if this is broadly better for the populace and certainly the US can be considered more of a trusted partner.  But of course the reciprocal is true.  If people actually somehow end up worse off the seeds of distrust would be even greater.  So, a lot of dynamics to keep an eye on.  Certainly opportunity to better the state of things, but that's certainly a change that always comes with risk.  So, lots to keep an eye on.  This will create opportunities, so we'll stay prudent, stay diligent.  Again, this is why you want to own quality.  Quality is defined by resilient businesses that can get through periods of turbulence, have the balance sheet to do it.  There's probably areas you want to stay away from.  Travel, right?  Because the spillover creates security risks around the world and you're seeing that certainly in the stocks.  Travel could be an area that does not receive the spending it might have for a prolonged period of time.  Again, depending on how this unwinds.  Energy markets could be strong, but again they can adjust usually fairly well.  Again, if Iran goes through a scorched earth approach to this because they feel they have nothing to lose, that would be maximum disruption. We saw that many years ago that some of you remember when Iraq when into Kuwait and as they were forced to withdraw they took a scorched earth approach.  And it was resolved, I think, surprisingly quickly but I think the magnitudes are bigger here.  So, not to ignore the risks.  Focus on the things that we know can get through this.  The safety trade is working, so certainly you're seeing that in the materials.  The TSX outperformed the S&P through the month of February and again, the volatility within the S&P much greater than the volatility of the S&P.  So, certainly lots of pockets and things to dig through.  But anyway, everyone be well.  Certainly an interesting world.  Hopefully some things that are useful there, but yeah, let's think three years out and do the best we can.  Protect yourselves today while looking to seize the moments and provide the best returns that we can.  All right, check in in a month.  See you.