Iran, Israel and Your Portfolio

Posted on August 29, 2010 by


How to invest if Israel or the US strikes Iran

In my last article I wrote about the possibility of Israel or the US striking Iran.  In this article I will discuss the implications for your portfolio.

The initial market effects of an Israeli / Iranian war will be that Israeli stock prices drop sharply and oil prices increase sharply.  I believe the situation for Israel will stabilize quickly, within about 30 days, and their stocks will recover.  Oil, on the other hand, will remain high for a time.

Why the difference?

Israeli stocks will drop because Israel itself will be faced with an existential threat.  But that will be resolved quickly.  The US and Europe, even if they might presently publicly oppose a war with Iran, will invariably come to Israel’s aid. They will not allow Israel to fail.

Oil prices, however, will remain high because Iran’s supply will not be available, and suppliers throughout the Middle East will be at risk from attack by Iran.  Iran has openly threatened their neighbors if they were to side with Israel.  Oil prices will remain elevated for an extended period, perhaps 3 to 6 months after hostilities begin.

Bet now?

The timing of an attack, if it even occurs, is uncertain.  If you were to bet now in anticipation of a strike, your investment might be tied up for quite some time.  I recommend against it (unless you know more than I do).  But if you’re determined to bet on this story now, you might place a small bet in long-term options.  You might buy puts on EIS (Israeli ETF), or calls on OIL.  Get an expiration date as far in the future as possible.

Better to keep your powder dry

Another strategy is to wait for the event itself, but be prepared to respond. As I said above, I think Israeli stocks will be hit hard, but recover quickly. So be ready to invest across the board in Israeli companies (or an ETF or two), once it’s clear Israel will survive.  Personally, I have no doubt about that, so I’ll be “in” as soon as I think stocks have hit bottom.

With regard to oil, I’d wait 30 to 60 days after hostilities begin before entering a short position.

What if the US attacks?

For various reasons, I think it is more likely that Israel will attack Iran than the US.   But if it turns out to be the US, my investment advice is not much different.  I believe Israeli stocks will be similarly imperiled, and oil will respond in the same way.