u/Deathmaster_ 5.0 4 ideas

The Iran conflict threatens to disrupt shipping through the Strait of Hormuz, a critical chokepoint for global oil supply. A potential disruption or escalation would reduce global oil supply, causing prices to spike and remain elevated for an extended period. This would also re-ignite inflation fears. The geopolitical risk premium in oil is increasing. As long as the conflict remains a threat, oil prices are likely to stay high or move higher, making a long position on oil a direct play on this thesis. A swift diplomatic resolution or de-escalation would remove the risk premium, causing oil prices to fall sharply. A severe global recession triggered by the conflict could also destroy demand, weighing on prices.

The author notes that historically, wars and prolonged geopolitical standoffs lead to larger government deficits and increased spending. A significant portion of this new government spending will be directed towards defense and re-armament as nations respond to the heightened geopolitical competition and conflict. If the Iran conflict signals a new, more volatile geopolitical era, defense contractors are poised to benefit from a long-term cycle of increased government spending on military hardware and services. The conflict could be contained and de-escalate, reducing the urgency for increased defense budgets. A major shift in political leadership could also lead to cuts in defense spending.

The author notes a sharp selloff in South Korea's KOSPI, driven by foreign capital outflows, following the Iran conflict. South Korea is a major energy importer and home to crowded semiconductor trades. Higher oil prices, a stronger USD, and a risk-off environment disproportionately harm its economy and equity market, causing the unwind of popular trades. The "Sell America, Buy Asia" trade is breaking. The macro headwinds (stronger dollar, higher oil) are particularly negative for South Korea, suggesting further downside as capital flees crowded positions. A de-escalation of the Iran conflict could cause oil prices to fall and the dollar to weaken, quickly reversing the capital outflows and causing a sharp rebound in Korean equities.

Geopolitical stress typically strengthens the US dollar as capital flows back into USD and US Treasuries for safety. The "Sell America, Buy Asia" trade was predicated on a weakening dollar and capital rotating out of the US. The Iran conflict reverses this, making US assets relatively more attractive as a safe haven. The unwind of the "Buy Asia" leg of the trade implies a strengthening of the "Buy America" side, as capital seeks safety and stability in US markets during a period of global uncertainty. The conflict could escalate to a point where it triggers a global recession, which would be negative for all risk assets, including US equities. The top comment notes that US markets were also selling off initially.