CITIC Securities: Recommend focusing on the "hedging + inflation" theme and strategically allocating energy assets

CITIC Securities Research Report states that the Iran conflict has lasted for a week, and its impact is spilling over into the global economy and markets through the Strait of Hormuz, causing a significant rise in energy prices. When there are issues in the Strait of Hormuz, the import of crude oil by Japan, South Korea, Thailand, Singapore, and India’s oil and gas supplies may be the first to be affected. The rise in energy prices will inevitably push up global inflation. Given the high uncertainty surrounding the Iran situation, investors can focus on the main theme of “hedging + inflation” and temporarily allocate assets in the energy sector. The US dollar is a relatively consensus-friendly currency during the conflict, likely to remain somewhat strong in the near term, while the 10-year US Treasury yield may lack sufficient downward room.

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Overseas Macro | Spillover Economic Impact and Trading Clues from the Iran Conflict

The Iran conflict has lasted for a week, and its impact is spilling over into the global economy and markets through the Strait of Hormuz, leading to a sharp increase in energy prices. When there are issues in the Strait of Hormuz, the crude oil imports by Japan, South Korea, Thailand, Singapore, and India’s oil and gas supplies may be the first to be affected. The rise in energy prices will inevitably push up global inflation. Given the high uncertainty surrounding the Iran situation, investors can focus on the main theme of “hedging + inflation” and temporarily allocate assets in the energy sector. The US dollar is a relatively consensus-friendly currency during the conflict, likely to remain somewhat strong in the near term, while the 10-year US Treasury yield may lack sufficient downward room.

▍ The impact of the Iran conflict is spilling over into the global economy through the Strait of Hormuz.

The Strait of Hormuz is a critical transit hub for global energy trade, mainly connecting oil-producing countries in the Persian Gulf with Asian energy importers. After tensions in Iran escalated, shipping through the Strait of Hormuz decreased rapidly, and oil production in the Persian Gulf was also affected, leading to a significant rise in global oil prices and European natural gas prices. However, neither has yet surpassed the peaks seen during the 2022 energy crisis.

▍ When there are issues in the Strait of Hormuz, some Asian economies will face noticeable exogenous shocks.

Japan, South Korea, Thailand, and Singapore rely on imports from the six Gulf Cooperation Council countries (Saudi Arabia, Iraq, Qatar, UAE, Kuwait, Bahrain) for over 50% of their total crude oil imports. Their energy supplies are most vulnerable if the Strait of Hormuz is closed. India derives 75% of its oil and gas imports from these six countries and is highly dependent on navigation through the Strait of Hormuz. Closure of the Strait would impact their energy import behaviors (e.g., shifting to imports from Russia and Brazil). Thailand, Singapore, South Korea, and India all have crude oil imports exceeding 3% of GDP. If the Strait remains effectively closed for a long period, these four economies could face secondary impacts from a “second round shock” to their energy supplies. However, their strategic petroleum reserves and long-term supply agreements can help buffer these effects.

▍ Rising energy prices will inevitably push up global inflation.

We estimate that a 10% increase in Brent crude oil prices roughly corresponds to a 0.13% rise in the US CPI. If oil prices stay around the recent average of $84 per barrel in the first week of March, the recent increase in oil prices could raise US CPI by about 0.3%, which is manageable. However, if prices continue to rise above $90 per barrel, inflation risks will become significant. The European Central Bank estimates that a 14.2% increase in oil prices and a 20.0% increase in gas prices by 2026 would raise the eurozone HICP inflation rate by 0.5 percentage points, similar to current conditions. We believe the current situation is less severe than the 2022 energy crisis. We estimate that a 10% increase in yen-denominated oil prices roughly corresponds to a 0.2% rise in Japan’s comprehensive CPI. If current oil prices persist, the Iran conflict’s inflationary impact on Japan will roughly offset the inflation mitigation effect of domestic electricity and gas subsidies.

▍ Focus on “hedging + inflation” theme, consider phased energy allocations, and the US dollar may remain somewhat strong.

In the week following the outbreak of the Iran conflict, global stock markets declined broadly, energy prices surged, the US dollar strengthened, and overseas bond markets declined. Interestingly, gold, the yen, and the Swiss franc have not recently shown “safe haven” attributes. The Korean stock market experienced sharp declines followed by sharp rebounds, indicating mixed market sentiment towards gold. Rising oil prices have also led markets to reduce expectations of loose dollar liquidity. Although risk appetite has declined, it has not shifted entirely to safe-haven assets. Given the high uncertainty of the Iran situation and unknown peak oil prices, investors can temporarily allocate in energy assets like crude oil to capture potential upside. However, market pricing of geopolitical conflicts tends to become less sensitive over time, and hostilities eventually end. When the Iran situation eases, energy exposures in portfolios should be adjusted accordingly. The US dollar is a relatively consensus-driven currency during the conflict, likely to remain somewhat strong in the near term. The 10-year US Treasury yield may lack sufficient downward room under the scenarios of “manageable conflict with stable economy” and “out-of-control conflict with rising inflation.”

▍ Risk Factors:

• Iran situation or other unexpected events exceeding expectations
• Overseas economic and inflation performance surpassing or falling short of expectations
• Changes in global market liquidity or sentiment exceeding expectations

(Source: Jiemian News)