What Does the Conflict With Iran Mean for Global Markets?

Michael Zeuner: 00:00

Welcome to the wealth enterprise briefing. Hi everyone. This is Michael zerner, one of the managing partners at we family offices. Thank you for listening to the wealth enterprise briefing. This episode of the wealth enterprise briefing is a special edition, and we’re going to be talking with Sam sugami, our global head of macro, a familiar voice to our regular listeners. And we’re going to be, we’re, we’re as we record. We’re just over a week into a huge geopolitical event, which is obviously the war with Iran, and Sam and I have talked again. If you’re a regular listener, you’ll know over the years, we’ve talked about how over the long run, geopolitical events tend not to impact global capital markets. In the short run, they do, particularly because they affect sentiment, and sentiment drives things in the short term. But Sam and I are going to take a look today and do a little bit of a dive into what’s happening from a geopolitical lens, and how that might be affecting short term markets, but also long term fundamentals. So welcome Sam. Thanks for joining me. Let’s start Sam with from where we sit today, what’s been the impact of this geopolitical event on the capital markets in the last week or so?

Sam Sudame: 01:28

Sure. So now we’ve been seeing higher geopolitical risks since the beginning of the year. It started with Venezuela and those years about Greenland. Now the conflict with Iran has escalated dramatically. And the reason why is that the Iranian conflict is significant is that 20% of the world’s oil and liquefied natural gas runs through the Straits of Hormuz. So the disruption can have significant impact on the global economy, which is a fundamental thing, and that is a fundamental factor, because rising geopolitical tensions in Iran have led to a significant risk premium in global energy markets that has raised concerns about oil supply disruption, which then leads to a worry about inflationary pressures and the broader global macro economic spillovers.

Michael Zeuner: 02:21

Okay, so so that that that’s very clear. But as a fundamental investor, what do you make of that risk and how much of it is likely to become fundamentally affecting global capital markets versus shorter term sentiment?

Sam Sudame: 02:36

So a few week conflict may not have much lasting scar on the economy and markets. However, a prolonged disruption of a few months risks a stagflationary supply shock, where growth starts to get reduced and inflation starts to rise.

Michael Zeuner: 02:57

So that’s interesting, Sam, because you and I have been talking for several months now, as we enter 2026 about what you’ve called an inflationary growth environment, and we’ve spent a lot of time talking about the implications of that, in particular, being sure that investors have exposure to inflation sensitive assets, particularly real assets, natural resources, et cetera. But what’s the difference between stagflationary versus inflationary growth?

Sam Sudame: 03:28

So with stagflationary growth, you have inflation rising, but you have economic growth falling within inflationary growth, which we thought was going to happen coming into this year, we still thought inflation was rising, but growth would also be rising as well. And one of the main reasons why a supply side shock, such as one with oil is a stagflationary shock, is that the higher oil prices act effectively as a tax hike and saps disposable income from households.

Michael Zeuner: 04:06

Which then affects corporate earnings, which then affects the long term pricing models for capital market assets.

Sam Sudame: 04:13

Exactly now, right now financial markets are currently positioned For short term disruption, not systemic breakdown. So two key points to look for are the duration of the hostilities and the degree of transit disruption through the Straits of Hormuz. So what the market is thinking right now is that it could be short lived. So what I’ve done is I’ve looked at the term structure of oil futures, which embeds the market’s current thinking. And right now, the market thinks the conflict will be short lived.

Michael Zeuner: 04:50

How do you see that? Sam, how do you see that in the numbers?

Sam Sudame: 04:54

So we look at something called a term structure. So what is the price of oil right now? What is it going to be a two months from now, three months from now, six months from now.

Michael Zeuner: 05:04

Futures, what does the market think it’s going to be, interest pricing.

Sam Sudame: 05:08

Because that expectation is then built into the future price of oil. So it’s a technical concept. It’s called a shift into backwardation, which means the price right now is going to be higher than the future, which means the market thinks this crisis will start to ease. So today, looking at the price of oil, it’s about $100 a barrel. Now, mind you, it was about $65 at the beginning of last week, so we have essentially seen a 50% increase in the price in within one week. But when we look out into the future, the futures market is pricing in $96 by mid April. So it thinks that oil is not really going to spike from here. By mid June, it sees $84 a barrel, and by mid November, about $70 so they think the price of oil will drop 30% by November.

Michael Zeuner: 06:05

So if the futures market is right, and that’s a big if, because things could change on a dime, right? But if the futures market is right, what does that sort of lead you to conclude in terms of how investors should be thinking about the implications?

Sam Sudame: 06:24

So the implications of it, even if it’s over this shorter, like, let’s say, a six month period of economic impact, the effect on substantial markets should still be significant. We should still expect to see a strengthening US dollar due to safe haven flows, last week, we saw the strongest movement by the US dollar in over here, equity market declines, because there could still be this impact on profit growth, wider credit spreads. Now last week, high yield, which is really a good barometer of stress as well, was relatively well contained. We did see spreads rise, but high yield didn’t have such a bad week. And then the big one, I think, is higher interest rates. So there’s an expectation that with inflation running higher because of higher energy costs, those higher interest rates would also impact growth. So what we saw last week was a fairly meaningful rise in the 10 year treasury. What was about 17 basis points? So we had been prepared that interest rates would rise. We should also what was, I thought was very interesting last week was that Gold fell. You know, for many times in this year, we talked about gold being a geopolitical risk hedge, and it was very interesting that Gold fell last week. Now it likely fell because the US dollar had such a strong week and that interest rates were higher, but overall, gold is still up about 20% this year.

Michael Zeuner: 08:00

So, so let’s, let’s back up Sam for a minute, and let’s go back in the time machine a month ago, right? And we’ve been talking about inflationary growth, and we’ve been talking about portfolio positioning, and I think there are sort of a few key themes that we’ve been talking about pretty consistently. One is with respect to fixed income portfolios that investors not make a bet in any significant way on rates coming down, not take too much interest rate risk in their portfolios. We felt credit risk was something that was not a significant risk at the moment, but interest rate risk was with respect to bonds, and as a result, that they stay sort of short to intermediate in terms of what’s known as duration, which is a measure of interest rate risk. And we felt that way, not so much because of geopolitical risk, but because we felt that with inflationary growth, that either the Fed and or the public bond market, particularly at the long end of the curve, where the public market tends to set prices, that rates could actually go up and that could be harmful to bond portfolios. I would assume that thesis is still very much intact, and staying short to intermediate and not taking a lot of duration or interest rate risk is still the order of the day for fixed income investors. So that’s that’s point one. Do you agree with that?

Sam Sudame: 09:26

Definitely. Because if inflation is biased upwards, we think rates could still rise mill over. We have a Fed meeting that is coming up soon, and the market is wondering whether the Fed will respond by lowering interest rates. I don’t think they will. The reason why is that currently, inflation is around 3% it is significantly higher than the Fed’s target, so that starting point means that the Fed doesn’t have much room to lower rates. So even though there may be fears about growth with oil prices rising, the Fed is still has its hands tied because of the starting place of inflation.

Michael Zeuner: 10:12

Okay, so, so that thesis stays intact. Second thesis was that Within equities, we felt having broadly diversified equities both US and international and then Within equities, value growth, core, small and mid cap, and not just making a bet on the Magnificent Seven tech stocks. Whether that got articulated through taking positions in different cap spaces like small to mid cap or through specific vehicles, like an equal weight index versus a capital weighted index. And be sure to have proper exposures outside the US in addition to the US. Do any of those because we were we saw the fundamentals being positive for equities, which is the growth side of the equation. Do any of those shift given what we’re looking at now?

Sam Sudame: 11:04

So being well diversified is key during times like this. So at the beginning of the year, we started seeing international stocks do very well, along with emerging markets. Those pulled back rapidly last week because of the impact of higher oil prices on those economies, because they’re much more vulnerable than the US is. But what we also saw last week, and this is a really good test of asset allocation growth stocks, which had been rocky since the beginning of the year, about software concerns, about over investment by mag seven companies, those stocks did relatively very well last week. NASDAQ was down about 1.2% holding up much better than the rest of the world because the mag seven companies, the Facebooks, Amazons, Googles, Microsofts, offer a flight to quality within the equity market. These are very powerful companies with very strong earnings model, and that acted as that ballast, if you will. In fact, those stocks did as well as core bonds last week.

Michael Zeuner: 12:12

Okay, and we’ve been relatively constructive on equities, although not overweight in general, but not underweight. And what I think I’m hearing you say push back if you disagree, is staying in equity, staying diversified. I mean, we’re always going to see volatility in equities. We’ve seen, I think, something like three to 5% drawdowns, right, depending on the day that you measure it. But I’m not hearing you say that there’s yet anything fundamental.

Sam Sudame: 12:39

So we just finished, we just wrapped up fourth quarter earnings, s p5, 100 earnings growth for the fourth quarter came in at an outstanding 14% we’re seeing a broadening out into other sectors with higher earnings growth. The S P after all of this, the s p5 100 is only 3% away from an all time high one, and the major reason is we’re seeing a backdrop of very solid US growth figures. So last week ISM manufacturing, what came in solid. We’ve This is the first time since 2022 we have seen back to back months of ISM manufacturing, rising. ISM services was one of the strongest we’ve seen in a very long time. We saw industrial production and durable goods rising. We’re continuing to see strong capex growth. So the underpinnings of the US economy remain solid, and that should continue to support earnings.

Michael Zeuner: 13:41

Subject to the oil price shock being short term, and that’s what you’re keeping an eye on. Okay, let’s go to the third theme that we’ve been pretty consistent talking about, which it falls under diversification, but it’s having exposure to because of the inflationary growth theme. It’s having exposure to asset classes that tend to do well in inflationary times, that broadly falls under the category of real assets. Within real assets, we have real estate, we have infrastructure which gets into power and data centers, as well as traditional railroads, bridges, toll roads and then third, natural resources, commodities, industrial metals, agricultural metals, oil, etc. You know, we’ve seen the price of natural resources go up significantly, particularly oil in the last week. Those investors who have brought exposure to natural resources have had have seen some protection in their portfolio over the last week. Do you expect that to continue? Are there any risks that you see there Sam?

Sam Sudame: 14:49

So when we look at oil, the price of oil was up 35% last week. Whenever there’s geopolitical risk in the Middle East, we’ve tended to see oil act as a good hedge. So. Gold continues to be although gold was down last week, gold continues to hedge against geopolitical risk. Natural Resources will benefit from capex, continued capex investment in the United States. This environment of stagflationary growth is very good for precious metals, but inflation is a good tailwind for real assets overall. As far as infrastructure goes, the world continues to have a massive demand for infrastructure investment, for more in developing power generation, as we talked about the long term theme of AI, traditional roads, bridges, water have massive tailwinds behind them, which should not change from what is happening out in the Middle East. Real Estate is also a solid investment right now as those headwinds have dissipated in terms of CapEx compression, and they can still benefit from growth.

Michael Zeuner: 16:00

Okay, so those are our top three themes, short to intermediate on duration and interest rate risk, stay diversified with inequities, but equities, we’re constructive on. And by diversified, we mean by capitalization, by market, by geography, you know, etc. And third, make sure to have exposure to natural resources a week or so into the war with Iran, those three theses are still intact. And of course, we’re keeping an eye on how things develop, and the one thing that we need to pay very close attention to is what happens with the price of oil, and is that $100 more of a fundamental shock, or is it a short term, short term issue that will resolve itself? So Sam, as always, very good to talk to you. We’ll release these updates as the situation changes. Thanks for keeping an eye on all the fundamentals for us.

Sam Sudame: 17:02

Thank you Michael.

Disclosure: 17:06

The wealth enterprise briefing is for informational and educational purposes only and does not consider the specific investment objectives, financial situation or particular needs of any listener. The information in the briefing is not a recommendation of any security and should not be relied upon as investment legal or tax advice.