If the world is to avoid a global recession, it will come down to one thing. The reopening of the Strait of Hormuz. Around 20% of the world’s oil and roughly a quarter of global LNG flows through that narrow passage. It is not just a geopolitical pressure point. It is one of the most important economic arteries in the world.
The problem is that the ball is well and truly in Iran's court, and it is effectively the only meaningful card they have left to play. They have absorbed significant economic and military pressure and have not capitulated. Having endured that level of strain and still holding its position, it is unlikely to give up the one lever that genuinely shifts the balance of power. The Strait is that lever.
So why would Iran reopen it? Not out of goodwill, and not simply because of pressure. They will only do so if the incentives are compelling enough. That likely means some combination of sanctions relief, de-escalation, or at the very least recognition of the strategic leverage they have demonstrated. Without that, reopening the Strait voluntarily makes little sense from their perspective.
How it plays out it from here might simply come down to who blinks first. At first glance this looks like a contest of military strength, but it isn’t. It is a contest of endurance and the longer this drags on, the more the economic consequences compound. Energy prices rise, supply chains tighten, and confidence falls. What started as a geopolitical conflict has already morphed into an economic one.
Iran can withstand pain and has done so for decades under sanctions. The United States faces different constraints. Political pressure, market pressure, and voter pressure. Trump may have overestimated the brute strength of the US military as a strategic advantage. Consequently, Iran is now using their position to drag this out and create chaos for the global economy.
There are few topics that generate as much concern globally as the price of fuel. A spike is a cause for concern. A sustained spike will quickly morph into outrage. In the middle of a cost of living crisis, an energy shock hits discretionary spending hard. Making matters worse, as the prospect of higher prices and inflation leads to central banks increasing interest rates. That's the double hit and we are already seeing that play out here in Australia.
The second-order effects are where this becomes more dangerous. It’s not just oil. Fertiliser markets begin to tighten, pushing up agricultural costs and ultimately food prices. Industrial inputs like helium, critical for medical and semiconductor industries, become constrained. Shipping costs rise as routes are disrupted and insurance premiums spike. The longer the Strait remains compromised, the more these pressures ripple through the global economy. This is how a shock turns into something more systemic, slowing global growth and the possibility of recession.
Allies are reluctant to join Trump in this conflict. It appears many are happy to keep their distance, ensuring that at the end of this it is clear where the blame rests. This is a USA decision. This is a Trump decision. His problem right now is that there is no obvious solution and not one that he can easily control.
From here it may well be Trump who is more desperate for this to end. He can declare victory and manage the narrative but unless the Strait reopens and the supply of commodities is restored then he has a problem. One that the world knows he has created and one that he needs to fix. He knows this.
Iran knows this too.
They want the world to understand the strength of their position and their ability to inflict economic pain on the world if they so choose. The question is how deeply they want the world to feel that pain. Push too hard and they risk uniting the world against them. The most likely path is controlled pressure. Enough to make the point but not enough to become the clear villain. They will want Trump to be seen as the problem, not move so aggressively that they are seen as the problem.
That said, Trump is nothing if not a creative problem solver. He is also unpredictable. So, it would be unwise for Iran to push Trump too hard or for markets to underestimate his ability to manoeuvre out of difficult situations. Push too far and his response may not be linear.
From an investor’s perspective, this is much less about the war itself and far more about the reopening of the Strait. Markets have shown they can absorb conflict. What they struggle with is sustained disruption to critical supply chains, particularly energy. The key variables to watch are simple. The duration of the disruption, the trajectory of oil prices, and any credible signals that shipping flows are normalising.
I still think this is resolved in a reasonable timeframe. There will be economic consequences, and some of them will linger. But as is often the case, it won’t be the conflict itself that does the real damage. It will be the bottleneck. Right now, markets are underestimating just how powerful that bottleneck is.
General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.
Positioning For War
For much of modern history, war and markets moved together in predictable ways. Conflict meant panic. Panic meant falling markets.
Yet the past few years have challenged that assumption.
Investors have lived through a remarkable sequence of shocks. The global shutdown of the COVID-19 Pandemic. Russia’s invasion of Ukraine in 2022. Rising trade tensions and tariffs between the United States and China. Each episode initially rattled markets. Each one, in time, faded into the background.
The pattern has been strikingly similar. Markets fall sharply on the news. Investors assess the damage. Then, almost inevitably, the recovery begins. Within months the narrative shifts from fear to opportunity, and markets move on to new highs.
Against that backdrop, the emerging confrontation between Iran and the alliance of United States and Israel has so far been treated in much the same way. Investors appear to be assuming that this will be another geopolitical shock that ultimately proves temporary.
That may well prove correct.
But there are a few caveats this time.
The first is escalation. War has a habit of taking on a life of its own. Once events begin to move quickly, the range of possible outcomes expands dramatically. Supply chains can be disrupted, alliances can shift, and energy markets can react violently. In those circumstances forecasting becomes far more difficult. Markets dislike nothing more than uncertainty.
The second risk is duration.
For markets and the global economy to remain resilient, this conflict likely needs to be short and sharp. A drawn-out war lasting many months would create a very different economic backdrop.
Energy sits at the centre of the issue.
Roughly a quarter of the world’s oil and gas supply moves through the narrow shipping corridor known as the Strait of Hormuz. Any disruption there would ripple through the global economy almost immediately. Oil prices will quickly push well beyond US$100 per barrel.
But the real problem is not just price. Energy is a physical commodity. When supply is disrupted, it is not simply a matter of paying more and carrying on as normal. There is literally less energy available to power factories, move goods and fuel transport networks.
That scarcity feeds directly into inflation.
Higher energy prices raise the cost of almost everything. Businesses pass those costs through where they can. Consumers feel it in fuel, food, and transport. Central banks, already wary after the inflation surge of recent years, are forced to keep interest rates higher for longer.
Growth slows. Confidence weakens.
In short, a prolonged disruption to global energy supply would materially change the economic outlook.
Yet there is also a counterbalance to this pessimism.
If the past few years have shown us anything, it is that the global economy has developed a surprising level of resilience. The shock delivered by the COVID shutdowns was arguably the most severe economic interruption since the Second World War. Entire industries stopped overnight. Borders closed. Global travel collapsed.
Yet the system adapted.
Supply chains reorganised. Governments deployed unprecedented fiscal support. Central banks flooded markets with liquidity. Within a remarkably short period the global economy found its footing again.
That experience has reshaped investor psychology. Markets now tend to assume disruption is temporary unless proven otherwise.
There is also a political dimension to consider.
Much of the timing and trajectory of this conflict ultimately rests with Donald Trump. If history offers any guide, markets play an important role in that calculation. Trump has long treated financial markets as a barometer of political success. When markets are strong, the narrative is working. When markets fall sharply, the pressure to change course increases.
For that reason, it is difficult to see a scenario where a prolonged conflict that significantly damages markets is allowed to continue indefinitely. At some point a declaration of victory, however loosely defined, becomes politically convenient.
This may not be conventional diplomacy. But Trump has rarely followed conventional scripts.
In that sense markets may already be assuming an implicit floor. A conflict that escalates too far risks undermining the economic backdrop heading into an election cycle. That is not a position any administration would welcome.
For investors, the implication is relatively clear.
The base case remains that this conflict proves short lived. Markets will wobble, volatility will increase and then attention will gradually shift back to the underlying drivers of the next cycle. Chief among those remains the extraordinary investment wave unfolding in artificial intelligence and advanced technology.
If that scenario plays out, periods of weakness are opportunities.
However, prudent investing always requires acknowledging the alternative paths. If the war escalates or drags on for months rather than weeks, markets could experience a more meaningful correction as energy prices rise and growth expectations fall.
That is why positioning matters.
We are selectively adding to our preferred companies, particularly those aligned with the long-term technology and AI themes that continue to reshape the global economy. At the same time we remain mindful that volatility may create even better opportunities ahead.
General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.
Historical Performance Disclaimer: Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions