Iran Conflict - Which trades & themes are most at risk?

Investing.com -- The military conflict involving Iran is escalating more quickly and more broadly than markets had anticipated, placing several widely held trades at risk, according to UBS analyst Bhanu Baweja.

In a new global strategy report, Baweja warned that “the most important question presently” is how long the Strait of Hormuz remains effectively shut, noting that “even partially impaired flow for several weeks risks strongly upsetting oil and global markets.”

Baweja wrote that while most observers expect the oil market to remain in surplus through 2027, “this surplus isn’t of much use if oil can’t flow to the end market.”

He added that the current conflict “carries a much higher risk, both on oil infrastructure regionally and in the Strait of Hormuz than Israel- Iran military confrontations of the last two years,” with tanker traffic already sharply reduced.

UBS highlighted that past geopolitical oil shocks typically normalised within four to five months, but today’s elevated equity valuations make markets more vulnerable.

Baweja noted that the S&P 500 trades at 22.2 times forward earnings, compared with a 14.3x median during prior shocks, adding: “Low index volatility betrays complacency.”

Several popular equity rotations are now at risk. Baweja said UBS sees “a high risk of reversal” in large-cap to small-cap, growth to value, and high-quality to low-quality trades, even before the latest escalation. In fixed income, UBS warned that the consensus steepener is also likely to fail in the near term.

In currency markets, Baweja wrote that higher oil prices mean “the dollar weakness consensus flounders,” particularly against emerging-market currencies.

UBS believes the key variable remains the duration of shipping disruptions in the Strait of Hormuz, which the firm called “the most important thing to watch.”

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