CONTRIBUTORS
Tony Davidow, CIMA®
Senior Alternatives Investment Strategist
Franklin Templeton Institute
In the latest episode of the Alternative Allocations podcast, I had the privilege of sitting down with my friend and colleague Kim Catechis as we explored the impact of the US-Iran war on the private markets. Kim broke down the impact of the war and elevated geopolitical tensions in the region and around the globe on oil prices, fertilizer and helium.
I began by asking Kim to describe the relationship of Iran and its neighbors. He noted that “The Middle East has a number of fissures and splits in it. These are religious, sectarian, political, social—and ethnic in some cases.” I asked him how we got to this point in time. Kim reminded me that “Of course, remember that like most of the world's map, the lines were not drawn by the people on the ground. They were drawn by imperial powers, some 200-300 years ago.”
While the US eliminated leaders, bombed facilities and weakened Iran’s defenses, the Islamic Revolutionary Guard Corps (IRGC) closed the Strait of Hormuz. This has had a devastating effect on the region and the world. In the United States, gas prices rose from under US$3 at the pump, to more than US$5, before receding after the initial ceasefire was announced. Europe and Asia are dependent on the Strait of Hormuz for their oil, and the region’s economy relies on the revenue from selling oil, fertilizer and helium. Note, helium is critical for chip production.
Gulf Countries Are Dependent on Hydrocarbons
Sources: FT Institute, WITS Energy Institute Statistical Review of World Energy 2024. Notes: Crude vs refined vs gas classification is by HS6 commodity lines (2709, 2710, 2711) where available. In several Gulf states, HS2711 “gas” exports include LPG and LNG together; Qatar stands out for having world-scale LNG export volumes. Exact HS6 breakdowns for all countries require direct WITS/OEC product queries or dataset downloads; the above blends publicly cited figures with best-inferred splits where direct HS6 export breakdowns aren’t available. Exports exclude services, and countries like UAE have substantial re-exports which dilute apparent hydrocarbon dependence.
Kim noted, “For the Gulf countries, they literally have taken big hits to their economies. For a country like Qatar, which is between 80%-85% dependent on export of liquid natural gas, the liquefied natural gas (LNG)—that's a massive hit. The IMF [International Monetary Fund] is suggesting the country could see an 8% to 10% hit to GDP this year. I mean, that's really bad news for them. For others, it's varying degrees.”
With a fragile ceasefire in place, I asked Kim how quickly it would take to get back to normal. Kim noted that before the war, the world produced 108 million barrels a day and consumed 104 million barrels. Opening the Strait of Hormuz and getting ships transporting oil will help in bringing down prices, but it will likely take several months to get back to normal levels. Let’s not forget that several oil refineries within the region have been damaged or destroyed.
As Kim described the long-term impact on the region and the rest of the world, I wanted to consider the impact on private markets. The war has reminded the world about the fragility of supply chains and the importance of accessing key natural resources. We have been focused on this macro theme as we see opportunities in building manufacturing here in America. This will also require an infrastructure buildout.
The war also serves as a reminder of the importance of energy independence and using alternative sources of energy so we are not held hostage by a hostile regime. This is an infrastructure theme that we have been discussing.
Both the war in the Middle East and the Ukrainian war have demonstrated the importance of drones and artificial intelligence (AI)-guided strikes. Future conflicts will no doubt increasingly use AI and technology rather than “boots on the ground.” This is an area for private equity innovation.
Lastly, the war, changing trade policies and general unrest serve as a valuable lesson of the importance of diversification. The markets are more connected than ever, and we believe it’s important for advisors and investors to diversify their portfolios. Secondaries can provide diversified private equity exposure, and real estate (equity and debt) have historically exhibited low-to-negative correlation to most traditional investments.
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Investment strategies involving Private Markets (such as Private Credit, Private Equity and Real Estate) are complex and speculative, entail significant risk and should not be considered a complete investment program. Such investments viewed as illiquid and may require a long-term commitment with no certainty of return. Depending on the product invested in, such investments and strategies may provide for only limited liquidity and are suitable only for persons who can afford to lose the entire amount of their investment. Private investments present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor's ability to dispose of them at a favorable time or price.
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