Episode 117 | Timely perspective on turmoil in the Middle East

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the shock is the issue, not just of the prices we've gone through.

We've lived through oil price at $100.

Yeah, exactly how quickly it's gone up.

So so that's a that's a big part of it.

It's interesting here where, you know, there's no magic number for,

for, gasoline prices at the pumps in the US.

Welcome to this episode of Investments Unplugged.

My name is Mark senior co chief investment strategist

here at Maine Life Investments.

And as always and joined here my partner in crime, Kevin Headland.

Welcome, Kev. How's it going, Mark? On. Yeah not too bad.

How are you? I'm good, I'm good. Things are going pretty good.

Spring is around the corner. The snow is melting.

It's opportunity.

I like it.

March break is up. So excited going into it.

We'll see how we feel coming out of it.

But, I still have the next couple of days off, that's for sure.

So this has been the first episode

of Investments Unplugged since the conflict in the Middle East

started on February 27th, and we thought we would take this episode

of Investments Unplugged and, discuss what's unfolding in the Middle East.

And there's obviously Kevin, as you know, there's many angles or perspectives

we can take.

We can take the American perspective in terms of, their strategy,

how long that's going to take.

We can take the Iranian perspective in terms of their strategy.

We can look at it from the perspective of the Iranian people.

You know, what's the odds of actually a revolution happening?

We can look at it from the perspective of the Arab states.

We're not going to do any of that because that's extremely fluid,

extremely dynamic, and something we just don't have any insight into.

That being said, what we thought we would take this episode to

do is really look at it from an investment perspective, kept

right, what's unfolding in the Middle East and the implications for investors

as much as we can, you know, look into the future.

This will be probably released in a week or two weeks, and we'll see how

that narrative has changed.

So what we're going to do

is we're going to look at it in terms of kind of four topics.

The first one being the backdrop in terms of okay,

what's the backdrop in the environment today.

Then we're going to look at Cab.

What what does

history tell us about geopolitical events, the impacts on markets.

We are going to spend some time talking about the nuances with this conflict.

And then last but not least, and from this perspective, most important

is the investment implications given what's happening in the Middle East,

the impact that it's having on commodities and asset classes

like equities of fixed income.

What should we do about it as investors. Okay.

So the backdrop do you want to start out or do you want me to keep going.

Yeah. Y'all see, it's, the backdrop.

We I think we all know the what's going on in the news.

I think the biggest issue that we're looking at is the,

spike in oil prices and the and natural gas prices as well,

a natural gas being, that much more important to Europe

and seeing some of the volume

we're seeing in Europe, equity markets because of natural gas prices.

Not too long ago.

the big risk, actually, after the, during the Ukraine, Russia conflict,

the big spike in natural gas prices there was talked about European recessions

because of that, because of how,

they need natural gas, especially during winter months.

So that is so important looking right now at gasoline prices.

So price the pump.

Canadians have noticed that I'm sure in some areas I'm hearing over

$2 a liter for gasoline regular unleaded

in the according to data from triple A,

the average gasoline prices national average is now roughly

$3.60 per gallon actually is a 27% jump since early March.

And that is not just the Iran, U.S conflict.

It also has to do a bit with the transition to summer blend.

summer blend as they move into the summer, there's the mixture of oil,

gasoline as a change.

And that usually adds about 10 to $0.15 a gallon.

national prices. So, definitely impact.

And, more people spend in gasoline,

of course, that changes their propensity and ability to spend on other things.

And two thirds of the U.S.

economy and economy remain, consumption.

So the more money you're taking in your pockets

from guessing prices, it's hard

to spend in other As an investment strategist, key thing

I'm looking at CEB on a day to day basis is the price of oil.

As you said, it permeates throughout the broader economy.

It impacts people on a day to day basis.

And why this conflict is nuanced is the sense that.

the nuances to this event is the fact that that area,

the Middle East is responsible for so much of oil production.

but it's also a gateway as well to the rest of the world.

So roughly 20% of global oil production comes from the Middle East.

And also we'll we'll talk about it in a bit is, as we said,

the Strait of Hormuz is responsible for basically 20% of direction.

We'll talk about the nuances around a bit.

But when you look at roughly and it depends how you measure it, Kev.

But total oil production on a daily basis.

Let's just round up and say it's roughly 100 million when you look at that part.

So Saudi Arabia is responsible for 11, Iran, five Iraq

four and a half, UAE for Kuwait, three when you add all of this up,

that's nearly 20 million barrels of oil.

And with the IEA releasing historic amounts in terms from their strategic

reserves,

I know some of these countries are saying they're going to increase, production.

We know sanctions against Russia have been lifted

with the hopes of production increasing there.

still only half.

So And you mentioned it's not just oil, it's natural gas.

Right?

So again, 20% of natural gas comes through the Strait of Hormuz.

Qatar is the biggest producer of it.

basically took off 20% of production from that.

And as you alluded to, Kev, when they did that, natural gas prices

in Europe increased 30% in one day.

Now, right now it's roughly at 51MW per hour.

But prior to this conflict, it was 30 and it hit a high of 57.

So it's come down a bit.

But think about that on your, day to day.

times are tough already. You have that oil prices.

So this is the challenge.

And you mentioned gasoline prices again is the way we're looking at

it is if oil continues to remain higher for longer

and it's not transitory, then that's going to have a real impact

on the global economy.

And we I've even talked about Cav and we won't go too much into the details,

but Venezuelan oil, Iranian oil, 70% of it goes to China.

And we know China is getting that at a discount.

Something to consider.

And not that we have any idea how this is going to unfold.

Could that have an impact on the Chinese economy if they're required

to go elsewhere and pay higher for oil for their economy?

I guess from the positive side, the global economy as a general basis

was on very solid footing, very resilient,

coming into this, which gives a bit of cushion here.

The key question I keep coming to you and which is nobody can answer

this is how long the longer we remain

in the conflict, oil price remain elevated.

That becomes a problem.

You're talking about, natural gas prices and shocks in European natural gas prices.

At one point, we're up over 100%.

You know, throughout this three weeks of this conflict,

the shock is the issue, not just of the prices we've gone through.

We've lived through oil price at $100.

Yeah, exactly how quickly it's gone up.

So so that's a that's a big part of it.

It's interesting here where, you know, there's no

magic number for, for, gasoline prices at the pumps in the US.

But over history, it seems like $4

a gallon is kind of that that Psychological.

to me. Yeah. Kind of psychological area.

Now, summers.

California's over $5 a gallon already.

So last time we saw gasoline prices jump like this was 2022,

during the early stages of the, the Russia Ukraine conflict.

And US did some holidays on the gasoline tax.

So there's measures in place to try

and perhaps reduce some of the short term impact to consumers.

But when you get over $5 a gallon and on average and sustained level,

then you start reading a a much bigger impact

to the broader economy and sustain inflation.

And that is becomes a much bigger issue overall for markets.

So let's go into the second topic, Kev, is whenever these geopolitical headlines

arise, we often take a step back and ask ourselves a very simple question.

Is this likely going to be disruptive or destructive?

And we've published a couple of slides on this.

If the most recent one you can connect with our LinkedIn.

We have it there. Reach out to us directly.

But essentially Kev it's a table of geopolitical events.

Going back to Pearl Harbor.

It outlines the one day, you know, when the event was,

you know, when the event happened, the one day returned the total drawdown.

We also break it down in terms of days to hit the bottom, days to recover.

And then we look at S&P three months and one year later.

And in a nutshell, the data suggests that more often and not a lot of these

geopolitical events are disruptive in nature, happen over a few weeks.

Their impacts on the markets

are very short lived from a decline and duration perspective.

And then the odds of be positive

three months and especially one year later are in your favor.

Is it?

I know I just pause, most of them are disrupted.

We haven't. Kevin.

Our careers together, we really haven't seen okay.

Put great financial crisis aside, put Covid aside.

Those were destructive.

But mostly the geopolitical risks

we've seen, including the Russia, Ukraine escalation.

Or remember, back in Trump's first presidency,

which Kim Jong un, they're typically disruptive.

But because as you mentioned, this could have an impact, on oil prices

and the global economy, it could be destructive.

And we kind of have a similar type of, you know,

geopolitical event back in 73, 74. Right.

You had the UN Copper War there.

There was an Arab oil strike, essentially the shock of oil.

And you saw a severe recession in the US.

And that's what we're paying attention to, is as this continues, could you see

a repeat of some sort of dynamic that unfolded in 73, 74?

It's question going back to science recently for

of course there were other elements going on in the economy as well.

So it's not just the, the, the the timing or the shock.

And oil prices.

But they were gasoline shortages in the U.S and limits on gasoline on lineups.

And you could see that impacting and again, how long it lasts.

And there's multiple other impacts there.

The last time we kind of saw a Joker event,

I guess leading to a recession,

was actually the 911 terrorist attacks.

And what I've been saying is kind of the GPU event does not

nicely, create the recession or, you know, is it a factor?

Is it the catalyst, the the straw that broke the camel's back?

I think that was also timing with regards to,

you know, just the latter stages of the recovery of the tech wreck as well.

So there are other, you know, issues involved as well.

So it wasn't just jumping event,

but markets were whipsawed for quite some time.

Is this going to be, factor there?

The as I said earlier, the good news is ultimately the economy was the resilient.

There was strong factors at play for equity markets.

Could this be a factor.

Again, it comes down to timing and length are really.

Well, I you were talking about that, Kevin.

I just was sticking my are there similarities

between that as you mentioned during the tech wreck and today. Right.

Like oil okay.

This conflict in the Middle East is just one aspect.

There's also some questioning about AI investment and the narrative around that.

And today Facebook, I think it was today that meta excuse me,

they announced that they're going to cut, I think, 10% of the workforce.

So is this happening?

You know, the questioning of AI investment and potential job cuts.

And at the same time, just by chance that maybe

oil prices are higher, gasoline prices are higher, and natural gas is higher.

And, you know, these things can all, you know, come together and create,

more material decline than what you would have thought initially.

But as you said, cave, we are entering this

from a healthier, you know, resilient global economy.

Rates have been cut across the world.

Fiscal spending is not going away.

But we're we're going to be dealing with this in the near term.

And I think that's a good, you know, transition.

So, you know, is this disruptive or destructive?

I'd say it's going to be destructive.

But the nuance to this is as it continues, it could increase

the odds and will likely lead to maybe it becoming destructive.

Right I think I think you misspoke there.

I think I heard destructive at first.

But we Or did I say that likely to be disruptive could could be destructive.

Let's, let's, you know, let's make sure we, highlight that.

will also say when we talk

about disruptive destructive, we talk about to the economy and markets,

not to actual, any specific That's a good point.

This is unfortunately, you know, these type of,

you know, conflicts and, and duplicate risks.

We see lots of life.

And there's a lot of tragedy involved.

But when we look, we're trying to focus just on the impact to markets

and investing

and trying to keep that lens when we're looking at these type of events.

And, you know, Cat, how hard that's been for me to do that

in this geopolitical event, given that I'm a Canadian Iranian.

So, you know, following very closely I have my own personal views.

We will not be sharing those.

But, you know, and I think it's a good exercise for me to have.

Right.

Is, I'm emotionally linked to this, but I need to take that hat off

and just look at it from this perspective with an investment lens.

And let's talk about the nuances potentially is again, Iran's a major

energy, player and has not only data, it has control over the Strait of Hormuz

and it's a critical, you know, energy chokepoint.

It's not that wide.

It's like 30km wide.

It's shallow.

unreal how narrow it is. How shallow is.

I can't imagine trying to have two tankers pass each other. No.

Yeah.

Yeah, exactly.

It just lights perpendicular basically to the.

Yeah.

So it's extremely tight and it's okay.

The narrow itself is 30km, but the passageways as you,

as you mentioned, are only three kilometers wide each way.

So think about all those BBC has this great,

satellite imagery of the port and pre escalation

and now and it's incredible how much traffic came in there.

Now some people are asking, well, why does Iran have control of this.

It's considered basically international Strait have

all ships are right to passage Iran can't legally block them.

But this is the nuance.

Iran has control over its own territorial protection.

So they can go on ships.

They can just cause the flow of traffic to be very slow.

And that's the nuance this time.

And one thing I'm watching is like, I think about, okay, let's say

there is control over that Strait of Hormuz.

Will the markets correct?

And then move on as if nothing's app not, not not as if nothing's happened.

But that is a big I think you know,

worry of markets in terms of that needs to be resolved

before you get a potential catalyst for risk taking.

It's the uncertainty about the Strait of Hormuz.

You think about, the increased cost of insurance, for talk

about this one, you know, relatively small area and how impactful, as you said,

20% of of oil flows through that strait on a daily basis.

A lot of, Middle East countries transport their oil

through that strait, to different, different areas around the world.

So it's that much important if there's some, countries,

I believe, they were talking about perhaps,

Saudi Arabia was looking at putting a pipeline to, the,

western side or reopening a pipeline on the western side of their country

to try and have more ability, more to get oil without using a chevron.

So there's a lot of talk about then how important, perhaps

maybe it realizes that countries need to perhaps look at a

another way to get their oil, to the rest of the world

without, being so reliant on, that street and market.

Just add to, you know, I was going to say,

I don't want to cut you off, but one of the interesting aspects,

the fact that you are, Canadian Iranian, is the, insight you have

and even some of the, you know, teachings you've talked bit about some of the

the going on there and the history about, Iran.

So, you having to have a very, unbiased approach, some of the insight

you have, can, can really help us to drive a little deeper

into the conflict and perhaps, what the longevity risks are.

I appreciate that, but even like I said, like it's just extremely dynamic.

It's fluid.

How where is the off ramps?

Do they want to take them? are the goals?

Everyone has a different goal in mind, right?

Everyone has a different goal.

So there's a lot that can happen.

And again IRA fiduciary duty is to our clients.

Our clients fiduciary duty is to their clients.

So taking a step back again and look at it from an investment lens.

What are the implications.

And we're getting questions okay.

What should I do in my portfolio. Should I.

Because at the same time bonds are not necessarily acting

in the way that investors would think typically during an equity selloff,

because, as you said, there is that risk for inflation to remain sticky,

maybe potentially reaccelerate because of the price of oil.

This is going to have implications for central bank policy.

So it's hard to make okay.

Let's go with the cash

because we could wake up one morning and, you know, you get a headline that there's

a ceasefire or they're going to the tables arena, go there to negotiate.

And by that time you had the opportunity to act, the moves already happened.

I think me anyways.

And we've talked about a it's more to of two things.

Number one is if you have cash, you're looking to deploy valuations

you were wary of.

The market is providing you a better opportunity.

So staging it by having, you know, a strategy saying, you know

not just say I'm going to put in

when markets are down, what are those trigger points to get that money in.

And then I think the other one too is maybe you have to start thinking about

fixed income from an inflation perspective.

If this remains longer lasting, that transitory dynamic

with energy that the fed so often talks about may not be transitory

and it may be stickier, and that may keep high, longer end of,

the term structure higher because of inflation expectations.

So for me, number one is how are you going to allocate your cash.

Because the market is going to give you that opportunity when the VIX is sturdy.

And we'll talk to that also fixed income.

But other than that I don't think oh go into energy and do this or that.

It's just there's just so it's so it's so vague out there and uncertain.

I don't have a lot of confidence making a big decision in that sense.

it's interesting that when we're coming into 2026,

our outlook we're already talking about expect more choppiness or volatility.

We didn't know why. We didn't know what the catalyst was.

But we had the economy kind of chugging along.

Not great but not you know, recession hit levels.

We had earnings that were growing, perhaps slowing in certain

areas of the world and still expanding other areas, Yeah.

but still then average like earnings growth at, say, and Valley,

which was elevated.

So there wasn't as much cushion in valuation to absorb, shocks.

And this is what we're seeing right now, kind of this

repricing mechanism happening.

But as you alluded to it, it's so fluid.

It predictable on a daily basis intraday you have the equity

markets opening up down 2% in the S&P 500

and then being positive by end of day, just by headline news and narratives.

And we all have our as I said, personal opinions.

I think the biggest key

when we have these events, when we go through these type of environments, is to

not let our emotions guide our investment decisions, our investment strategy.

And perhaps this is another reminder of the need

to be diversified for long term portfolio success.

It's not about just being overweight in one area of the world

or one asset class, but having that diversification that is key.

Yeah.

And I think as we move forward, Kevin, one thing I'm thinking about is let's say

this is resolved in a week or two weeks, whenever will

there be a premium attached to oil, whatever that amount is moving forward,

because Iranians have always threatened

to use the Strait of Hormuz as, as leverage.

It's never resulted to that.

And I know the Strait is open today.

Except for certain, you know, vessels,

but. Well, markets, as you said.

Well, insurance companies once this if this is resolved

and once it's resolved, insurance companies say, okay, it's resolved

your rates are higher anymore.

I, it's hard for me to see rate kind of you know, you've kind of taken that.

Oh it's never happened before and it's happened.

And will there be higher oil prices whatever that dollars

per barrel is moving forward because of of this.

And could that have implications for inflation.

So again, being long duration, you know, in this type of environment,

we've been speaking about it for years now.

But and the reasons have changed, right.

The reason fiscal spending was one reason now it's maybe transitioned

to not only be those factors, but also energy prices potentially moving forward.

It's interesting.

I think one of the benefits of, of active management in this type of environment

is the ability to do some snare analysis on certain stocks and see how levered

they are to energy prices, how much of it impact it is to their input costs.

Of course, energy next to employment is the second largest

cost typically of for a company.

But you can talk about look at companies and say what are their energy costs

and how that impacts that.

So that's one aspect of it from an active management equity side on fixed income.

This is the interesting aspect is you have two sides of the coin,

which is quite interesting, where take the U.S.

Treasury at curve for example.

Normally when you have this uncertainty and you pick a risk,

you have kind of like the safety.

So you have people buying U.S.

treasuries, but then you have also the impact

of oil prices causing, again, as you said, inflation.

Where does it go from, you know, how do you balance those risks out?

I think this is where, you know, you don't want to probably be taking

too much duration or risk in portfolios, making too long term calls.

You know, the the incremental yield is not, that great right now.

It's not an absolute

like the safety high quality investor credit remains attractive.

But the key question now what is central banks to you?

It's quite interesting that back in 2004, Ben Bernanke was actually talking

about the substitutes for oil shock in and how it plays in Federal Reserve minds.

And saying we're trying to balance

inflation or price stability with the economy in terms of unemployment.

So do we raise rates to combat inflation?

Do we cut rates because we're worried about, account weakness?

Yeah, it's often kind of maybe we just wait and see approach.

So when we look at rate cuts, for example, in 2026, we were expecting

three full rate cuts by end of year in 2026 for a Federal Reserve.

Now the market is pricing maybe not even one in some Southside

shops that we look at, some research we're getting is not even any in 2026.

Now, because we're in the middle of March, I think perhaps a little bit too early

to talk about by the end of this year,

the will of the Federal Reserve, especially under, new chairman,

in as of the end of May, there's a will to still cut rates.

The equity market wants the Federal Reserve to cut rates in an environment

where inflation is stable ish, employment is stable ish,

and you get 2 to 3 rate cuts in that environment.

That's attractive.

So, you know, since today, it's I would say it's a big wait and see

approach for central banks in terms of or even bank Q&A, where they,

you know, they raise rates to combat and short term inflation.

But that's one thing that would be quite interesting with.

And when you have that uncertainty, this is where you don't

want to be trying to just play, you know, bets on duration.

This is where you want to be

probably a bit short duration that more, away from some of the, the

the nuances, the volatility of the,

yield curve and being higher quality

corporate credit, I think is a great way to to kind of, play this, result.

But the key is also

a patient's fixed income, more so than equities is a patient game.

The income gets better over the year.

And outside of defaults you get paid it at maturity.

So, patience is definitely a play for fixed income.

But I think it's another reminder why we need this,

in our portfolios to kind of balance some of the short term equity volatility.

something that just quickly touch on as well in terms of inflation is,

you know, food prices.

And the reason I bring that up is the Strait of Hormuz

is also very important in terms of, sulfur, which is a key

ingredient in basically potash, you know, for fertilizer, for food

and the sake responsible for 50% of seaborne sulfur trade.

So what impacts could that have on food prices

and what impact could that have on emerging markets

that are central banks are cutting rates overall.

And so there's a lot of unknowns.

And the reality is it's extremely fluid.

It's changing by the hourly basis.

And when it comes to conflict you're also vulnerable

to mistakes like central banks are vulnerable to mistakes.

And in environments of geopolitical risk mistakes increase,

the odds of them happening.

And that again increases the odds of headline risk.

So wait and see.

From this perspective, something we're watching very closely is oil.

if the sell off continues and that's the other challenge you have to

in terms of allocating risk, markets haven't really sold off that much.

S&P I think is peak down 5%.

The markets are acting as if they believe this is going to be more of a shorter

term, medium term.

And if that's not the case, it's maybe a little bit on the volume.

But so to your point,

you don't have a lot of valuation or cushion on your side yet.

That may happen.

You know,

you mentioned earlier about the VIX, which is the vault index for the S&P 500.

And we talk about deploying capital.

This is one where it's kind of

very indicative of when you should be deploying capital.

Now it seems very counterintuitive,

but the right thing to do is deploy capital, deploy cash

when markets are at extreme levels of volatility, usually the big sell offs.

And that It's hard because you're feeling that markets are so bad.

And it's as you said it's it it makes you sick to your stomach to invest.

But that is actually the right time to invest.

Now, the key levels for us, based on our,

research is when the VIX hits 30, Yeah.

it hasn't hit 30 yet It's not it's nudged it a couple of times.

past during intraday.

So it has pulled up intraday. That

Now we're sitting around 24.

So right now but based on our research going back to 1990,

we've looked at saying if you've only invested

when the VIX is above 30 on a month and basis,

what are your six month, one year and two year four returns?

So your six month return is upwards of 13%.

Your one year four return is upwards of 22%.

And your to your annual return is around 15%.

Now if you look at, at all levels, your six month return is only roughly 5%,

your one year return is less than ten,

and it's your annual return is roughly eight.

So if you invest when things are really feeling bad

and really volatile, that's the right time to invest and right.

Tend to deploy capital. If you have cash on the sidelines.

And something that we're monitoring very closely is, is,

maximum level or heightened volatility in the markets.

And this will be signaling that perhaps for a patient longer term investors,

if you have cash on the sidelines,

this could be a great time to be in the equity markets. Yeah.

And in history would suggest that. Right.

Even those scenarios where that geopolitical or geopolitical event

was destructive

for that medium to long term investors that still took advantage of it.

Maybe the near term returns were, you know, a little bit challenging

to get through, but it ultimately the medium to long term returns

gave you what you needed from the markets to be whatever your financial goal was.

So I think that's a very good, place to pause by the time cap

this podcast comes out, who knows what have transpired.

But I think it keeps everyone's

yeah everyone's jobs interesting I think from it's important you know

just many lenses and angles to look at this.

But from an investment perspective, it's going to be volatile.

Embrace the volatility.

But more often than not over the medium to long term,

these are just line items in a table from an investment perspective.

So with that I think you have let's stop there.

Any last comments?

I would just think for investors, if you listen to this podcast,

remind yourselves it's all about your financial plan.

It's not about the short term.

Figure out, talk to your advisors.

Make sure you're well positioned,

align yourself for your goals, not necessarily your emotions.

Exactly.

And I want to thank everyone that listens to the podcast.

I want to thank everyone.

We're we want to thank everyone that, recommends the podcast.

really appreciate when everyone recommends it.

It allows this to get in front of other like minded individuals.

If you enjoy the podcast, please rate us five.

Helps us with our distribution.

It helps us in terms of our, content.

So thank you again.

And behalf. Makhanya.

Kevin Allen, have a great one. Take care. But.

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