The situation in the Middle East carries huge risks – but also opportunities for aggressive investors
The American attack on Iran's nuclear facilities sites has set the world on a knife's edge. Where do we go from here?
In a toughly worded address to the nation on Saturday night, President Donald Trump made it clear that more attacks will come if Iran retaliates. He said the theocracy has only two choices: peace or tragedy.
The U.S. delivered what could be a knockout blow to Iran's nuclear ambitions by using bunker buster bombs against the country's three main enrichment facility, including the Fordo complex which is buried beneath a mountain. As of the time of writing the extent of the damage had not been verified but the President said the sites had been 'obliterated'.
If so, that's a big win from a U.S.-Israeli perspective. But it comes with huge risks. Worst case, the action could spiral into World War III if Russia or China decide to come to Iran's aid.
But that seems highly unlikely, despite warnings from the Kremlin not to target Iran's supreme leader. No one likes the Ayatollahs very much and Israeli attacks have exposed Iran's military weaknesses. Risking a global war in this context isn't in the interests of either Moscow or Beijing.
Still, there are many potential problems if Iran decides to strike back and still has the means to do so. It could attempt to close the Strait of Hormuz, the gateway to the oil exporting ports of the Persian Gulf, thus driving oil prices sharply higher. It could fire on U.S. military bases in the region. Iran's Houthi allies in Yemen could resume their attacks on shipping in the Red Sea.
President Trump says he'd prefer peace talks, but he's ordered more naval forces to the region, including another carrier group, just in case.
All this leaves investors wondering what to do. The situation is fluid and potentially toxic. As I see it, there are two courses of action.
This is basically a hunker down approach. Limit risk to the extent possible and allow events to play themselves out. Strategies should include the following.
Own gold. I'm sounding like a broken record on this, but gold keeps touching new all-time highs for a reason. It's the ultimate safe haven in times of turbulence, and this is about as turbulent as it gets, short of all-out world war. The TSX Global Gold Index is up almost 50 per cent so far this year. Agnico Eagle Mines Ltd. (AEM-T, a recommendation of my Internet Wealth Builder newsletter, is ahead 47.9 per cent. Another pick, SPDR Gold Shares (GLD-A), the world's largest physically backed gold ETF, is ahead about 30 per cent this year.
Raise cash. Cash is king – again. Interest rates are relatively low, but if you shop around, you'll find that small financial institutions are paying up to 3.5 per cent on savings accounts. That's a decent return for parking some money for a while. Check ratehub.ca for the latest rates.
Invest in dividend stocks. Low-risk dividend-paying stocks should hold their value unless the market totally collapses. I don't expect that to happen. The iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV-T) is ahead 11.1 per cent since its low for the year in April.
Stay calm. The next couple of weeks could be disquieting. Assuming you have a good investment plan, stay with it.
Look for opportunities. Depending how things develop, we could see major moves in key industries and in commodities. Active traders may wish to take advantage of them.
Energy stocks could jump. It's expected that oil and natural gas prices will rise, at least in the short term. Analysts were forecasting an increase of us$3-$5 per barrel of oil when trading opens this week. How long that will last will depend on Iran's response to the U.S.-Israeli attacks. If it decides to try to close the Strait of Hormuz and/or attack energy facilities in neighbouring countries like Saudi Arabia, we could see oil prices quickly rise to over US$100 a barrel. Energy giants like Canadian Natural Resources Ltd. (CNQ-T) should benefit.
Defence stocks look strong. The shares of companies that manufacture tanks, rockets, guns, bombs, planes, and other warfare equipment were already on the rise prior to the latest developments in the Middle East. This week's NATO meetings, which will include a focus on raising defence spending, will also boost interest in the sector.
RTX Corp. (RTX-N), formerly known as Raytheon, is one of the largest aerospace and defence companies in the world. We recommended it in June 2022. The stock is up 44 per cent in the past year, and still climbing.
For those who prefer the diversification of ETFs, the Invesco Aerospace and Defense ETF (PPA-A) has gained 19.8 per cent since touching its low for the year in April. The iShares U.S. Aerospace and Defense ETF (ITA-A) gained 26 per cent in the same period.
Obviously, profiting from war is anathema to many people. If you're among them, just concentrate on protecting the value of your portfolio as best you can and hope the situation in the Middle East doesn't spiral out of control.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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