Investment Implications for Different Scenarios Around Israel-US-Iran War - HSBC Report

As tensions escalate in the ongoing the Israel-US-Iran war, HSBC assess the market impact of West Asia conflict if the war eases, but uncertainty prevails, or when the war linked tensions continues to grow.

For oil markets, two things matter: the transit through the Strait of Hormuz and Iran's oil production level (almost all of its crude exports go to China).

An ex-commander of Iran's Revolutionary Guards said that the government would allow oil ships to pass through the Strait of Hormuz, where 19% of global supply transits, according to a HSBC report.

Bloomberg shows that a number of ships have made U-turns, but others have still been transiting, suggesting that traffic is down but has not completely stopped.

'We believe that a prolonged blockade would be hard to implement, but even a short one would cause an oil price spike," Willem Sets, Global Chief Investment Officer, HSBC Private Bank and Premier Wealth, noted.  

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Meanwhile, Iran's production of oil stands at 4.7mn barrels coincidentally matching the 4.6mn bpd spare capacity at OPEC (mainly in Saudi Arabia).

On the other hand, OPEC+ had already planned to meet and is expected to lift its April quota by 137l¢ bpd and double the pace of monthly hikes to 280 kbd from May to July. Bigger production hikes could help a bit, but only if the oil can transit through the Strait of Hormuz.

Investment Scenario When Strikes Ease, Uncertainty Remains

Economy: Growth remains resilient; oil prices elevated but not disruptive, however, investment sentiment is cautious amid geopolitical uncertainty.
Oil: Volatile near USD70 
Rates: Rates in line with our current forecast: Fed/ECB on hold; BoE continues to cut
FX: USD modestly firmer; JPY supported, EUR weaker
Equities: US remains resilient; defense and oil supported 
Credit: Investment grade and emerging markets are preferred over high yield 
Safe havens: Gold supported as a hedge Alternatives, while hedge funds take advantage of higher volatility.

Investment Scenario When Israel-US-Iran War Escalates

Economy: Oil price spike lifts short- term inflation expectations, real incomes in Europe and emerging-market importers decline, confidence weakens, and downside risks are noted to growth rise.
FX: USD moves higher vs EUR and GBP (EUR/GBP lower). JPY more supported and CHF outperforms in Europe 
Equities: Broad risk-off; Europe and oil importers underperform; UK outperforms due to defensive value and energy exposure; cyclicals underperform defensives; banks hurt by a flattening yield curve and growth risks.
Credit: Spreads widen alternatives, hedge funds are crucial given their ability to short and manage risk.