Subscribe
Share
Share
Embed
This month, James, Giles and Alejandro discuss the market impact of the Iran conflict (01:30), including disruptions to oil and LNG flows (16:00), the inflationary consequences of higher energy prices (06:00), and why central banks are increasingly cautious (08:30). The episode explores why the UK economy may be especially exposed (11:30), what rising bond yields signal for markets (13:30), and how investors are positioning across energy, commodities and resilient supply chain assets (22:30).
This podcast is brought to you by TrinityBridge – trinitybridge.com – and features James Tulloch, Senior Investment Specialist, in conversation with Giles Parkinson, Head of Equities and Alejandro Velez, Senior Equity Analyst.
This podcast is brought to you by TrinityBridge – trinitybridge.com – and features James Tulloch, Senior Investment Specialist, in conversation with Giles Parkinson, Head of Equities and Alejandro Velez, Senior Equity Analyst.
We’ve created this podcast to set out possible approaches. Please do not view it as financial advice, or its content as investment recommendations. Just because an investment or an investment strategy has performed well in the past, it does not mean it will continue to do so. Our predictions are based on information that is currently available, however events and markets can and do change rapidly.
Creators and Guests
What is Insight Talks?
Our in-house experts share our views on the current market conditions facing investors. Brought to you by TrinityBridge.
We've created this podcast to set out possible approaches. Please do not view it as financial advice or its content as investment recommendations. Just because an investment or an investment strategy has performed well in the past does not mean that it will continue to do so. Our predictions are based on information that is currently available. However, events and markets can and do change rapidly.
Speaker 2:Hello, and a very warm welcome to the latest edition of the Insight Talks podcast, our first since the Easter break and the end of the first quarter of the year already. I'm James Tulloch, and I'm joined as ever by our head of equities, Giles Parkinson. Giles, welcome. Great to see you as always.
Speaker 3:Hey, James. Great to see you again.
Speaker 2:And this month, we're delighted to welcome senior equity analyst Alejandro Velez back to the podcast. Alejandro, welcome. Thanks very much indeed for joining us.
Speaker 4:Thanks for having
Speaker 2:Alejandro will be helping us take a closer look at the implications of the Iran war for energy and energy markets. Clearly, there's plenty to be getting into there, and we'll explore the whys and wherefores with with Ali very, very shortly. But, Giles, let's begin with the latest news flow. At the time we recorded the last podcast, the confrontation in The Middle East was in its first week or its first few days, really. We're now into week six already.
Speaker 2:And while the ceasefire currently holds, an impasse remains, and negotiations between The US and Iran have not, thus far yielded much or at least they haven't reached a a mutually agreeable conclusion. But from a market perspective, although there's been notable volatility, the reaction has so far been actually relatively muted, all things considered.
Speaker 3:Mhmm.
Speaker 2:We're recording on the April 15, and so far this week, global equity markets have actually risen despite the news over the prior weekend that negotiations concluded without a a deal, and The US would impose its own blockade on the the Strait Of Helmuth.
Speaker 3:Yes, James. So although the weekend did end without a deal, investors are focused on the fact that the two sides came away signaling that they would continue talks. So at the time of recording, this seems set for later this week. James, markets, whether equity, bond, fixed income commodities, that they move on anticipated changes rather than necessarily the absolute of a particular situation. So think back to recent history.
Speaker 3:Right? Tariffs were bad, but then they were less bad than inspected, inspected, and then they were expected to become less bad in in future. That was enough for markets to rally. COVID lockdowns were bad, but then they became less restrictive over time and were lifted eventually. Again, that was enough for markets to rally even whilst you were still living in those lockdowns itself.
Speaker 3:It seemed like quite a dim picture. And so it is with the current crisis, I think. So both sides are talking both sides were talking about beginning to talk, and then they began talking, and then they've agreed to talk again. And this frankly is a cue. It's that rate of change, James.
Speaker 3:It's that cue for oil to fall back and equities, bonds, and gold to rally because in the water markets, less bad is good.
Speaker 2:Yeah. Yeah. In indeed. Historically, I guess, geopolitical shocks like this tend to produce short term, volatility rather than lasting bear markets unless, of course, they lead to a sustained economic slowdown. Now there seems to be an expectation in markets that the consequences of a prolonged confrontation here would be unpalatable for for all stakeholders and that a de escalation and end to all hostilities would ensue, in due course as all parties sought to declare some kind of of win and, and look for for for the off ramp.
Speaker 2:But I think seeing the the the impasse enter its its sort of sixth week means that it's already perhaps a little bit longer term than initially expected. Have we started to see the impact on inflation and growth begin to show up in the data? And and if so, how significant has that been?
Speaker 3:A little bit. So from a jobs and inflation perspective, US job creation was actually much stronger than than expected in March. But there were some specific reasons for that, and the broader trend of very sluggish job market does remain intact. Little hiring's taken place over the last twelve months. And Fed chair Jerome Powell, he's spoken of a, quote, delicate balance in in the labor market.
Speaker 3:So it's this dynamic, James, where you've got few jobs are being added, but employers are not really implementing any job cuts, any layoffs, and any great pace either. Mhmm. So prior to the war, some policymakers had pushed for rate cuts to head off any labor market weakness. But with the news last week that US inflation had jumped back up to its highest level in nearly two years, I think a patience wait and see approach is likely the only option for the central bank in the near term. Sure.
Speaker 3:US consumer prices were reported to have climbed from 3.3% over the twelve months to March. That's a sharp pickup from 2.4% in February. So in terms of the inflation data, James, yes, we're seeing that quite quickly in terms of the impact of the energy price spike. In terms of sort of the more coincidental lagging economic indicators like jobs and employment, any impact from the war is gonna take a little longer to filter through.
Speaker 2:Mhmm. Yeah. Yeah. Sure. It's it's certainly moved the dial for for central banks, as you'd suggest, with the Federal Reserve and others very much in that that wait and see mode.
Speaker 2:And policymakers at the Fed, the Bank of England, and the European Central Bank all left interest rates on hold at their respective March meetings, didn't they?
Speaker 3:Yes. Central bankers are having to balance the competing risks of higher inflation and weaker economic growth, stagflation, in other words, and the potential for an energy induced inflation shock has seen investors abruptly shift from anticipating, if you think back just two months ago, anticipating more interest rate cuts to be over the year 2026 to actually flipping and being concerned about possible increases. So just to around the world on some of those. So just six weeks ago, markets were pricing in one or two quarter point interest rate cuts from the Bank of England this year.
Speaker 2:Mhmm.
Speaker 3:But by the end of the month, markets are pricing in two interest rate hikes over the next twelve months.
Speaker 2:Mhmm.
Speaker 3:As you say, the Bank of England did leave rates unchanged at 3.75 at their last meeting. Scooting over the ponds to The US, so their interest rate expectations have also been very volatile. At one stage, futures markets were also forecasting two interest rate hikes over the next year, like in The UK, but actually now it's back to half a cut. So that's still less than the three cuts that were expected over the next twelve months before the conflict began. Mhmm.
Speaker 3:Expectations for rate hikes globally may quickly unwind if the conflict in The Middle East does deescalate soon.
Speaker 2:Yeah. Yeah. Indeed. But of course the impact I guess across economies will inevitably be uneven. And thinking domestically, Giles, The UK seems apparently more vulnerable than some here with both the IMF and the OECD suggesting recently that The UK would be hardest hit amongst major developed market economies?
Speaker 3:Yes. It does seem that way. As a net importer of energy, The UK economy is highly sensitive to supply shocks. Now, typically, the Bank of England would prefer to look through this or through an energy price spike, which ultimately deem a transitory surge in inflation and focus on the underlying health of the economy. Now stepping back, a lot of the media discussion rightly focuses on oil, but actually large amounts of natural gas are also exported through Hormuz.
Speaker 3:And Russia's invasion of Ukraine in 2022, I mean, hindsight exposed The UK's vulnerability to the to the gas to the natural gas market
Speaker 4:Yeah.
Speaker 3:Shocks. Now although, again, thinking back a few years, inflation was already high and rising after the COVID pandemic as those lockdowns eased, the Ukraine conflict sparked a more persistent inflation problem, which the Bank of England struggled to control. Rate setters are likely, in my view, to be especially focused on avoiding any such policy misstep this time around. Now as far as inflation's concerned, the latest UK data, which was released during March and up to the February, may now be ancient news. But at 3%, it's I I think it did still show that underlying inflation was stubbornly high before the Iran conflict started.
Speaker 3:Now a spike in oil and gas prices clearly has the potential to hit net importers of energy hard, like The UK. Mhmm. Government borrowing costs and mortgages rates have risen, and the likelihood of interest rate cuts to the Bank of England has fallen as we touched on.
Speaker 2:Yeah. Yeah. Indeed. As you say, The UK borrowing costs have moved higher accordingly. But, of course, the move in UK borrowing costs higher yields is is far from an isolated one with sovereign bond prices falling and and yields rising meaningfully elsewhere too.
Speaker 2:And that sudden threat of higher inflation and lower growth has seen bond and equity markets as well as some other asset classes actually become more positively correlated on the on the downside, hasn't it?
Speaker 3:Yes. Indeed. But I think the move in UK borrowing costs has been more pronounced. So at the time of recording, the benchmark ten year guilt yield or that's the government's cost of borrowing is around 4.7%. Now that's risen from 4.2% where it was immediately before the conflict.
Speaker 2:Yes.
Speaker 3:Now prior to the announcement of a ceasefire, had been as high as five, so it's already come in a little bit, fallen a little bit. That 5% was the highest level since 2008. Now yields on tenured US Treasuries and German bonds have also risen, but it hasn't been anything quite so markedly. Again, it's thinking back to that concept of The UK is quite vulnerable to higher energy import costs.
Speaker 2:Mhmm.
Speaker 3:What about equities and other asset class? Well, stocks have fallen unsurprisingly given the high level of uncertainty. The anomaly perhaps, I think, has been in gold. It did fall below $4,400 an ounce at one stage before recovering from late in March and on into April. I mean, the reason I say an anomaly perhaps is because the Iran war is definitely a stagflation impulse.
Speaker 3:Right? You get high inflation, lower economic growth, and in theory, should gold should function well in such a scenario, but it hasn't in the short term. I think actually what's going on here is it could be down to some central banks, particularly Asian central banks. Again, Asian countries, typically big importers of energy, having to sell their gold reserves to ensure that they've got sufficient currency and FX liquidity to manage moves in this environment. However, again, stepping back, it's important to put moves of both gold and equity markets in context.
Speaker 3:At the most recent troughs, two weeks ago now, gold in The UK's FTSE hundred were really only back to the same price levels that we saw as recently as the December, sort of early early January type period. So even at that point, the situation was not, yet at least, comparable to the shock of twenty twenty two following Russia's invasion of Ukraine.
Speaker 2:Yeah. Yeah. Indeed. Indeed. Okay.
Speaker 2:Giles, for the time being, thank you very much indeed. We'll look to to bring Alejandro in here as I know you'll be able to provide, even more color on exactly what has taken place in The Middle East and and the implications, not just in terms of economic data, but the actual practicalities of the situation as well. Firstly, Ali, just give us a flavor, if you can, of exactly why this is important to the global economy, why it's not simply a a regional military conflict.
Speaker 4:Yeah. James, thank you for having me again. So The Middle East is absolutely critical to the global commodity system. It is a major producer of oil, gas, and refined products, But it also produces a broad set of other commodities that keep the global economy functioning day to day. To put a few numbers around that, roughly 20% of global oil supply comes from The Middle East.
Speaker 4:Around 22% of global fertilizers, around a quarter of the aluminum, 20% of LNG, somewhere between 2030% of petrochemical feedstock. So you have a lot of products that keep the global economy going coming from that region. And what turned these from a regional conflict into a global problem was the closure of the Strait Of Hormuz. And for context, there are roughly 200 maritime straits around the world, but only about two dozen of those really matter for global commerce. And Hormuz is one of them and probably sits in the top three in terms of importance simply because of how central oil and gas and its derivatives are to everyday life.
Speaker 2:Yeah. Okay. Okay. And perhaps could you give us some numbers which just contextualize that importance and the implications of a prolonged closure of the Strait Of Hormuz?
Speaker 4:Yeah. So to put to put some numbers there, before the conflict, you had around a 130 vessels of different sizes transiting the Strait every single day. So they were carrying oil, gas, and a wide range of other commodities. And between the March 13 and the April 9, you had a 122 crossings in total. So what used to happen in one day is now taking close to a month.
Speaker 2:Right.
Speaker 4:And when Iran closes straight, so as as the the the ships that were already in The Gulf were stranded, you now have close to 900 vessels inside of The Gulf. Mhmm. And these are carrying maybe a 100,000,000 barrels of oil plus large volumes of other commodities. Now under normal conditions, these flows are constantly supplying China, India, Japan, South Korea, other Southeast Asian economies. And The UK, Europe, and The US also buy from the Middle East, although in lower quantities.
Speaker 4:So, yeah, these volumes, they do feed local refining systems, agriculture, petrochemicals, technology supply chains, so quite relevant. And then when you think about the immediate implications, so last the last vessels left the Strait on the February 20. And when you factor in the sailing times, you first had an impact in Southeast Asia, including Australia and New Zealand. Then that impact is being felt first into Africa, then Latin America, and now it is coming into Europe. Eventually, The US, although The US is more insulated than most simply because of their domestic energy and commodity production.
Speaker 4:But even there, if you maintain these high oil prices and overall high commodity prices, they will filter through to consumers and industry in coming months if there
Speaker 2:is no resolution. Yeah, indeed. Giles sort of touched on this a little bit earlier, but for for The UK and and to an extent Europe, whilst there are undoubtedly serious implications, this isn't currently a repeat of the twenty twenty two energy crisis. Is it just give us a flavor of of how and why this is this is different.
Speaker 4:Yeah. I think it's quite different, both for The UK and for Europe. In 2022, the shock was primarily felt through household gas and electricity bills because Russian pipeline gas made up over 40% of total European gas imports. This time around, reliance on Middle Eastern LNG is much lower. It's close to 9% of total gas needs for Europe.
Speaker 4:But despite the differences, The UK, I think, will still feel the impact in other ways. So for example, around 43,000,000 inbound tourists or visitors came into The UK in 2024. Most came from Europe, but around a third of those came from outside. So that's roughly 13,000,000 people. And these travelers overwhelmingly arrived by air.
Speaker 4:So if you think about how much or how many of them came from Asia, I mean, it's hard to pin down. But if we assume that a third of these non European visitors were Asian and that maybe half of them will not be able to travel because flights are unavailable or unaffordable, then you could see 2,000,000 fewer visitors into The UK this year.
Speaker 2:Right.
Speaker 4:Then on top of that, on a normal year, The UK has around 6,000 takeoffs and landings every day across its airports. Jet fuel prices into Europe have more than doubled in the last six weeks. And as a result, I think a meaningful number of those flights simply won't happen this year. And then there's the domestic transport channel. So The UK has close to 42,000,000 registered vehicles.
Speaker 4:And the average number of miles each of these travel is close to 7,000 per year. Only 3.5% of these vehicles are electric or hybrid. Mhmm. So the rest still rely on petrol and diesel, and they consume each of them about 900 liters of fuel per year. So when fuel prices move, households will feel the pain.
Speaker 4:And you do have petrol prices already reflecting the difficulties or the shortages, and they have moved about 15% higher year to date when you compare to 2025. Diesel prices are 35% higher as well. And so for the average household, you could see maybe an additional £200 to £450 per year just on incremental fuel expenditures. Then when you think about wholesale gas prices, they haven't increased as dramatically as they did in 2022, so going back to the comparison, but they are still around 70% higher. I mean, they have been coming down in the last few days, but they remain higher than what they were before the crisis started.
Speaker 4:And so again, this will feed into household utility bills later in the year. Now on the brighter side for Europe, there were over 100,000,000 tourists visiting The Middle East in 2024. And if you exclude Saudi Arabia's religious tourism, that number is about 70,000,000. And I would expect many of those who can afford to find to sorry, who can afford to travel and find the travel, we'll be looking at Europe as a destination. So you you could see a strong summer season provided that Europe finds enough jet fuel for the aircraft.
Speaker 4:Okay. Alright. So plenty to think about
Speaker 2:in terms of household budgeting and what to do for some holiday plans as well. So it's easy in these kind of situations to become very focused on the immediate term and the sort of relentless day to day news flow, is often very negative. Clearly, we don't know how things are going to play out. But if we try and think a little bit more over the sort of medium term, what are the scenarios we should be contemplating from here over the next sort of six to twelve months?
Speaker 4:Yeah. So as you and Giles were discussing before, The US and Iran are now engaged in negotiations. The two week ceasefire has now already been extended. That sounds constructive. But I think in reality, Iran's primary leverage is still the Strait Of So I think they are unlikely to relinquish it very quickly or as quickly as we would want them to.
Speaker 4:So from Iran's perspective, when you think about the Strait Of Hormuz, the marginal benefit of disrupting it is much greater than the cost of disruption. And for The US and other neutral parties to this conflict, it's quite the opposite. So the cost of disruption is immediate and is very high. And therefore, that asymmetry makes the negotiations very noisy and unpredictable. And so there is also the physical dimension to consider because a few of the infrastructure assets in the region have been hit, about 60 of those in total.
Speaker 4:Several of these, about eight really, are critically important. These include LNG plants, refineries, petrochemical facilities, storage tanks, etcetera. And so returning these to operational capabilities will take months, I think, not weeks, assuming a resolution is agreed to Okay. In the in the immediate term. So even if this trade reopened tomorrow, then you would still be looking at several months for flows to normalize.
Speaker 2:Mhmm.
Speaker 4:And then on top of that, every day that this trade remains closed, it's going to add to the global economic cost. And therefore, I think demand will have to adjust to whatever supply is available. But when supply finally returns, there's going to be a lag in that demand recovery as well. And that could mean, ironically, that oil prices, which now have overshoot, will then fall sharply once peace is restored. And then longer term, and this is the important thing for Iran to keep in mind, is you only close the straight up once because I would expect most of the Middle Eastern countries that are not being affected to consider building additional routes to market.
Speaker 4:So that means more pipeline infrastructure. And then also, you will have other countries that now have or are sitting on large reserves, including, for example, Venezuela, to increase production. That includes also The UK, where depending on policy, whether it starts to be more, I guess, pragmatic, you could see a revival in North Sea production as a result.
Speaker 2:Yeah. Okay. All right. Let's just try and end on an optimistic footing if can, Ali. What are the signs we can look for in the news for genuine indications that the situation is improving?
Speaker 4:Well, I think the most important signal is seeing ships moving through the Strait Of Hormuz. Yes. You want to see outbound traffic because you need to clear that 900 vessel backlog. Mhmm. But you also need to see inbound traffic because that tells you that ship owners are feeling safe, insurance is available Yeah.
Speaker 4:And the crews are willing to sail. And the other price in the sorry. The other key indicator is is price convergence. So today, you're seeing that data Brent, which reflects the physical crude loading. So I it's kind of the spot price for actual crude.
Speaker 4:Mhmm. It's trading at a 30 to $40 per barrel premium to the next month futures Right. Which is basically what you tend to see in the press and which is normally quoted as the price of oil. Yeah. Before the crisis, that premium was only $1 to $2, and that means that there is there is an acute shortage and that stress is real.
Speaker 4:And so when those prices start converging again, that will tell you the stress is easing.
Speaker 2:So yeah. Okay. All right. Thank you very much, Ali. We'll certainly hope that we get a positive outcome in terms of the flow of traffic through the Strait very, very shortly.
Speaker 2:Giles, perhaps we can conclude with a comment on the actions being taken from an investment point of view. And, please feel free to to interject here as well. It's clearly important not to make knee jerk reactions, and inactivity can be an an active decision in in situations like this, of course. But has the situation fundamentally changed your outlook in terms of sector or stock preferences? And, you know, are oil and gas companies now much more attractive, for example?
Speaker 3:Let's think back to before the conflict. One the things observing in markets, there was definitely a healthy broadening performance as investors sought out companies that might benefit from increased investment in in more resilient supply chains, local infrastructure, and defense. Now this latter trade, which we really saw in January and February, was dubbed the halo trade. So that's not a high altitude, low opening parachute trump. In markets, that stands for hard assets, low risk of obsolescence.
Speaker 3:Halo, hard asset, low obsolescence. It was the antidote to increasing fears about the long term profitability of software and other white collar service companies that were seen as increasing at risk from AI disruption. So my opinion would be when the dust settles in The Middle East, it would be reasonable to expect this trade to reassert itself. And indeed, interestingly, the effects of the war in Iran only really serve to emphasize the risks to global supply chains. Yeah.
Speaker 3:I agree with Giles. And I would also add that if you go back to
Speaker 4:the beginning of the year, the consensus was that there was too much oil, and the commodity price reflected that. So at the other end of the conflict, we may not see some of the demand returning while supply is restored, which I think would result in much lower oil prices. So I guess that is probably not so good for oil and gas shares, which have done very well as a result of the conflict and did very well last year as well. But it would be generally good for the global economy, I think. And just to complement Giles' comment, I think you also need to look at the, I guess, second order effects of the conflict.
Speaker 4:Yeah. And definitely, mentioned the possibility of Europe having a a very strong summer season as a result of tourists not going to the Middle East but arriving into the Southern Euro beaches. Mhmm. But you can also think of, I mean, infrastructure companies and those who will be rebuilding what's being damaged and building the pipelines to carry the oil to the Red Sea rather than the Strait Of Hormuz, I think we'll we'll be do we'll be doing well as well. Okay.
Speaker 4:Alright. Wonderful. Thank you very much.
Speaker 2:Both great to have your your considered insights as ever. Alejandro, thank you very much.
Speaker 4:Thank you, James.
Speaker 2:Giles, thanks as always to you too.
Speaker 3:Cheers, James. All the best.
Speaker 2:And thank you very much to everyone for for listening to your pod to the podcast. Your support is is greatly appreciated. We will, of course, return to record another one next month when, of course, a big, part of our focus will inevitably be the the outcome of the UK's May elections. But for now, thank you very much, and goodbye.