Chief Market Strategist, Asia Pacific
In Brief
- An agreement to reopen the Strait of Hormuz reopening would reduce a major source of global economic risk.
- Supply normalization may take weeks, if not months, with insurance costs, damaged infrastructure, and reserve rebuilding keeping energy prices elevated.
- Investors may see a risk-on rotation into lagging sectors, Asian markets, and longer-duration bonds, while energy security and defense spending remain longer-term themes.
What we know so far
U.S. President Trump announced that a deal has been reached to extend the ceasefire and reopen the Strait of Hormuz. This has been confirmed by Iran’s deputy foreign minister, as well as by Pakistan and Qatar, the mediators in these negotiations. An official signing ceremony is expected to take place this Friday in Switzerland. While U.S. President Trump has announced similar deals in the past, confirmation from Iran and the mediators increases the likelihood that this agreement will proceed.
Details of the agreement remain limited at this point, and the situation can still change even after the memorandum of understanding (MOU) is signed. This is unlikely to be the end of negotiations, as durable consensus on Iran’s nuclear program—and easing tensions among the Gulf countries—would be difficult to achieve sustainably. Moreover, there have been sporadic military actions from both sides since the initial ceasefire was reached in early April. The conflict between Israel and Hezbollah in Lebanon also remains a wildcard for this peace process. Nonetheless, the agreement to reopen the Strait of Hormuz would be the most relevant part for investors.
What does this mean for the global economy?
Reopening the Strait is clearly a positive for the global economy, as disruptions in energy and petrochemical supplies can introduce stagflation risks. While markets may be quick to price in recovery, a return to normalization would take time.
The first hurdle will be convincing insurers and shipping companies that it is safe for vessels to transit the Strait of Hormuz. Even with the reopening, insurance premia for ships passing through the Strait could remain elevated, increasing the cost of oil, gas, and other products from the region.
It will also take time for energy production, refining, and logistics capacity to return to pre-conflict levels. A reasonable estimate for normalization is weeks, if not two to three months. This does not account for production facilities that may have been damaged by Iranian attacks; some could take two to three years to repair and bring back online.
Economies and governments may also seek to replenish inventories and strategic reserves in case the situation in the Middle East deteriorates again. Overall, this suggests energy prices are unlikely to fall back to pre-conflict levels in the near term.
For central banks, reopening the Strait should provide some relief, as the initial inflation shock from energy prices may not yet have fully filtered through to inflation expectations. This would allow the U.S. Federal Reserve to hold rates this week and continue monitoring. The European Central Bank (ECB) raised policy rates last week, as it was already on a tightening path ahead of the conflict due to building inflationary pressures. If energy prices remain calm on a sustained basis, this should give the ECB more flexibility to adjust policy later in the year.
What does this mean for investors?
Unsurprisingly, the immediate market reaction is a risk-on rally. This could prompt further rotation, benefiting recent laggards. Non-tech sectors may play catch-up if a major source of economic uncertainty is receding. Consumer-related companies, energy-intensive industries, and transportation could benefit.
In Asia, ASEAN and India have seen performance hindered by energy shortages and inflation pressures. An eventual resumption of energy imports should help support these markets. This also opens a window for investors to diversify away from technology, which has already performed well year-to-date. This type of rotation calls for active management in equity allocation.
The prospect of peaking policy rates could also support adding duration in selected government bond markets, as well as a modest tightening of credit spreads. Improved risk appetite could also renew pressure on the U.S. dollar.
Beyond the immediate market reaction to a deal and the reopening of the Strait, investors may have questions about the longer-term implications of this conflict.
First, energy security is once again at the top of the agenda. The Russia–Ukraine conflict forced European governments to reassess energy dependence; the Middle East conflict has had an even more significant impact on many Asian economies. Where oil and gas are imported from should become a policy discussion for all governments. This also raises questions about energy sources and the role of non-fossil fuels, including renewables and nuclear power.
Second, the U.S.–Iran conflict suggests that the scale of defense spending is not the only factor influencing outcomes, but also how that money is spent. High-volume, low-cost weapons—such as drones—gave Iran an advantage in controlling the Strait of Hormuz and threatening other Gulf states to gain leverage. The economics of defense is likely to evolve in the coming years, potentially driving rotation within the defense industry.