Stocks Poised to Benefit from the End of the Iran War

The US-Iran war has been one of the most significant geopolitical risk events in recent history. Financial markets are usually impacted not just by geopolitical developments, but also show an opposite reaction when those developments dissipate.

The stock market is one of the financial markets that tends to react heavily to the onset and dissipation of geopolitical events. A geopolitical event, such as a war or even a threat of it, tends to produce winners and losers across several stock market classes. But in the same way, the end of a conflict will have the opposite effect, boosting the stocks of companies that took heavy damage while the conflict raged.

Whenever a war ends, it changes the outlook for inflation, commodity prices, consumer spending, global trade, and transportation. If the war is centered on countries that are large oil producers, the outlook centers on energy prices, transportation, and inflation. Investors looking to benefit from stocks supported by the end of such conflicts would need to understand stocks in sectors exposed to the risk premium posed by geopolitical tensions, as well as the dissipation of these tensions.

Why Stock Markets Welcome the End of Conflict

The US-Iran war had a profound economic impact due to the risk premium it posed to energy supplies. Not only did the conflict affect Iran’s ability to export oil as one of the world’s major producers, but it also affected the ability of other Gulf nations to export oil and energy products such as LNG. An additional stress impact came from the blockade of a key shipping conduit, the Strait of Hormuz. This channel is the transportation route for 20% of the world’s oil exports and, more importantly, the key route by which China and India receive their oil imports. China and India are among the top 3 oil importers, and the oil-shock risk premium stemming from geopolitical tensions has had a profound impact on their stock markets.  In addition, the blockage caused traders to price in the following:

• Higher oil prices
• Increased shipping costs (as shippers sought longer alternative routes to bypass the Hormuz blockade).
• Rising insurance premiums (due to the increased risks of product damage)
• Elevated inflation expectations (as higher energy costs impact production costs and ultimately the prices at the consumer end)
• Greater market volatility

The end of the US-Iran war brought about an unwinding of the risk premium. This produced the following results:

• Lower energy prices
• Reduced inflation pressures
• Greater consumer spending power
• Stronger corporate earnings in certain sectors
• Improved business confidence

Stocks that Will Benefit from the End of the US-Iran War

Here are stocks that have benefited from the end of the US-Iran war. The benefit is two-fold. Firstly, these stocks sold off during the war, bringing their prices down to attractive levels. Secondly, the knowledge that these stocks would recover at the end of the conflict would have made them attractive buys for investors and traders looking for capital appreciation.

1) Airline Stocks

Airline stocks benefit heavily when geopolitical tensions dissipate. The greatest operating cost for airlines comes from JetA1 aviation fuel. This fuel is a derivative of crude oil refining, and if oil prices rise, the costs are passed on to energy derivatives. Additionally, the cost of shipping the refined aviation fuel rose due to higher shipping and insurance premiums stemming from the Hormuz blockade. The fact that energy costs for airlines are a running cost makes it all the more significant.

A rise in fuel costs can lead to a decline in operating margins for airlines, as ticket prices can only be raised so far to offset these costs without causing a drop in demand as consumers reshape their spending patterns.

A decline in oil prices reduces airlines’ fuel costs, improves their operating margins, and boosts their profitability potential. Typically, this could also lead to an upside repricing of price targets and earnings forecasts as cash flow improves.

Lower oil prices also boost demand for tickets, which would typically be lower-priced than when the war premium was in place. With reduced inflationary pressures and more disposable income, airline ticket sales can increase, leading to improvements in the aforementioned multiples.  

2) Transportation and Logistics Companies

Transportation firms include shipping companies, logistics providers, freight operators, and rail companies. Again, fuel costs are among their largest operational expenses, and whenever these energy costs fall, they improve margins across the entire supply chain. The end of the war looks set to bring an improvement in shipping volumes, especially as the peace deal included the reopening of the Strait of Hormuz. An increase in trade activity and cross-border commerce is also expected to result from the end of the war. An improvement in global business confidence could increase demand for transportation and logistics companies, improving their profitability prospects.

3) Consumer Discretionary Stocks

High energy prices raise the prices of goods and services. We saw this at the height of the US-Iran war when the US Consumer Price Index report for April showed a surge in inflation that beat market expectations. When fuel prices drop, the cost of goods and services at the consumer level follows suit.

Individuals and households have more disposable income when they are not spending as much as they used to, refilling their car tanks, buying cheaper plane tickets, or using lower-priced cooking fuels. This boosts consumer spending on retail purchases, electronics, household and personal gadgets, dining, and travel. Simply put, consumer-focused businesses benefit from lower oil prices, which favors investor rotation into consumer discretionary stocks.

4) Manufacturing and Industrial Companies

Today’s manufacturing processes across nearly all industries are energy-intensive. Rising oil prices will almost invariably lead to higher costs of industrial inputs and fuel. Companies involved in manufacturing (typically called the industrials) benefit from lower fuel costs, as they reduce operational expenses, improve margins, and make companies more competitive.

5) Technology Stocks

Tech stocks have indirect exposure to oil prices through risk sentiment and the impact of energy prices on capital markets. The oil-shock risk premium resulting from the US-Iran war triggered global risk aversion, which is typically negative for risk-associated tech stocks. But when oil prices are lower, it favors a risk-on environment, which makes tech stocks attractive. Lower oil prices reduce inflationary expectations and push the interest rate expectations towards the dovish end of the spectrum. When interest rates are lower, stocks become more attractive, and tech stocks see strong buying interest under these conditions.

6) Travel and Hospitality Companies

The travel and hospitality sector is one of the most exposed to oil price changes due to a war premium. The end of the US-Iran war has once more opened up the tourism sector in the Middle East. For instance, occupancy rates at hotels in Dubai, which took a drastic hit when the war started, are starting to pick up. Lower oil prices reduce travel costs, so we see increased travel activity for business or tourism.

Conclusion

There are several stocks listed in these categories that still hold potential after the war-led market collapse pushed prices to attractive levels. Look for those that appear undervalued (sound fundamentals relative to current pricing), as those stocks make the best investing use cases.