Iran/U.S. tensions: Peace talks in the short term, but there is room for violence over longer period

Peace talks in the short term but there is room for violence over longer period

• We believe that the military escalation would leave both the U.S. and Iran in a very vulnerable position, so we expect that tension would ease in the region, at least in the short term. Europe has been the first to respond with diplomatic actions. On Wednesday, Turkey announced it will coordinate diplomatic efforts with both sides of the conflict. Trump’s latest remarks in his address to the nation on Wednesday after Iran launched missiles at U.S.-led forces in Iraq indicate that no further military actions will be taken at this stage but more economic sanctions will be imposed. Existing U.S. sanctions have cost Iran $200 bln in foreign-exchange income and investment, according to Iran officials

How the U.S. justifies its actions against Iran?

• In many ways the U.S. attack was a response to the actions of Iran, that, according to the White House, has been provoking Washington by attacking the tankers in the Gulf of Oman and the Persian Gulf in May and June, the Saudi oil fields in September and killing the U.S. military personnel in Iraq. However, above all, it comes as consequence of Iran actions in Iraq which led to revolt and formation of new anti-U.S. government, hence undermining 17 years of a U.S. mission as Iraq voted for withdrawing of U.S. troops and officials. Iraq’s Prime Minister Adel Abdul-Mahdi recommended the “urgent” withdrawal of foreign troops from the country as his preferred option to fix relations with the U.S. and others. Trump warned Iran of major U.S. retaliation and threatened heavy sanctions on Iraq if American troops are forced to leave unless the country repays billions in military base construction costs
• The U.S. is losing influence in the Middle East and as a consequence is trying to bolster its presence with the latest deployment of about 4,200 troops to Kuwait, Trump has bolstered American forces by about 17,000 personnel since May, undermining his vow to get the country out of “endless wars.”

 What Iran will do next?

• Iran no longer considers itself bound by the 2015 nuclear agreement negotiated with the U.S. and other world powers, its government said on Sunday, according to the semi-official Fars news organization. While Donald Trump said he’s prepared to strike Iran “in a disproportionate manner” if it retaliates against any U.S. target
• In a speech broadcast on state television, Ayatollah Khamenei, Iran’s supreme leader, said Iran’s goal was to expel U.S. forces from the Middle East. However, we think that Iran will back down at this stage. Europe has condemned the U.S. actions, while Iran portrays itself as a victim of American aggression. If Tehran opts for escalation, it will lose the support of Europe, which accounts for more than 20% of Iran's trade turnover under the INSTEX financial settlement mechanism
• Diplomatic efforts to avoid full-scale military conflict would support risk appetite in the short term
• Europe, led by France and Germany, is now trying to resolve the conflict peacefully. As French President Emmanuel Macron worked the phones, European Union foreign ministers arranged an extraordinary meeting on January 10 in Brussels to discuss the situation. German Chancellor Angela Merkel has accepted an invitation from Russian President Vladimir Putin to visit Russia on January 11. Turkey will join the efforts to bring Iran and the U.S. to diplomatic talks

 Easing tensions – top picks

• Our recommendations from the 2020 strategy have not changed: Gazprom, Sberbank, Lukoil, Surgutneftegas, AFC Sistema, Mail.ru Group and Yandex
• In the U.S., mostly IT sector such as Nvidia, Micron, Apple, AMD and others. In China, retail and IT sector, Alibaba, Baidu, Tencent, Momo and others
• We believe that the Ukrainian issuers such as Naftogas (+2.6%), Dtek (+0.5%), Metinvest (+1%) and sovereign issues (>1.8%) will be the top gainers in the bond market this year. The Mexican banks, including Unifin 28 (+0.5%) and Indian Vedanta (+2%), which we recommended at the end of the year, are expected to become the top-performers

 Conflict escalation – top picks

• The gold will advance further to $1694/oz, the highest since March 2013, while Brent may hit the high of April 2019, $75/bbl, and move up to $80/bbl of October 2018, and above
• Tactical ideas include Russian precious metals producers such as Polyus, Petropavlovsk and Polymetal, Norilsk Nickel, and O&G such as Lukoil and U.S. oil and gas companies, but the highlighted stocks could come under pressure in the event of a full-scale military conflict
• In the U.S. market, the most promising stocks are oil and gas and military defence stocks. With respect to O&G these are Marathon Oil, Devon Energy, EQT, ConocoPhillips, Schlumberger, Halliburton, etc.
• If conflict escalates further, we highly recommend three U.S. defence stocks that could benefit from it, these are Raytheon (the largest guided missile producer), Lockheed Martin (the leading F-35 Fighter Jet manufacturer) and Northrop Grumman (the major player in the global drone market)

 Overall, there are enough growth drivers for further market growth

• Federal Reserve officials downplayed concerns about geopolitical uncertainty on the U.S. Economy
• Latest ADP U.S. private payrolls jumped by 202,000 jobs last month, the largest gain since April, indicate continued hiring strength in private sector and another sign of strong economy, NFP data for December will be released on Friday
• U.S. President Donald Trump said he will sign the first phase of a trade deal with China on January 15
• China’s central bank trimmed the amount of cash that lenders must hold in reserve, injecting funds into the economy and signalling continued action to reduce borrowing costs for companies
• China’s manufacturing sector continued to expand output in December, adding to evidence that the world’s second-largest economy is stabilizing