While the attack on Iran was well telegraphed, we initially viewed it as another market wobble worth looking through rather than the start of a more durable risk-off move. In our almost 30 years in the capital markets, we have learned the hard way that geopolitical risk events should be bought. The facts also pointed to a short war: both sides have limited missile stockpiles, implying a natural cap on escalation; regime change did not appear to be an explicit US objective but more of a potential “bonus”; and most experts agree regime change is unlikely through air power alone. Once the narrow goals of degrading Iran’s nuclear and ballistic capabilities are achieved, a ceasefire is the most logical outcome, especially as any prolonged disruption of the Strait of Hormuz would push energy prices sharply higher, reviving inflation and slowing economic growth. With US mid‑terms only eight months away, it is hard to see why President Trump would want this war to drag on for more than a few weeks. If Republicans lose both the House and the Senate, impeachment is likely, effectively turning Trump into a lame duck for the rest of his term.
Our initial view was clearly not unique. The S&P 500 fell only 2% in the first week after the attack. Oil and gas spot prices moved sharply higher, but the forward curves shifted mainly in the front end, signalling that markets expect energy flows through Hormuz to normalise relatively soon.
This makes us uncomfortable. While we still believe self‑preservation is the dominant incentive for the US president and that he may soon declare “a great victory,” the disruption risk to the Strait of Hormuz, and the attacks on neighbouring Gulf countries’ energy infrastructure has been more severe than we initially expected. In other words, what first looked like another contained geopolitical scare has evolved into something with a more meaningful tail risk. There is no guarantee that fighting will end quickly or that flows through Hormuz will normalize without disruption. Iran knows it cannot win the war militarily, but its effective control over the strait has re‑confirmed its leverage and the economic pain it can inflict. Crucially, Iran has learned it does not need to mine the strait or attack every vessel; the threat alone may be enough to deter or at least reduce traffic in the future. Even if Hormuz volumes recover to average 70% of normal for a sustained period, nearly 2% of global oil supply would be interrupted, after accounting for diverting flows through pipelines. This seemingly small impact would keep upward pressure on oil prices and importantly make the global oil markets much more sensitive to any disruptions.
Uncertainty could therefore linger. A higher risk premium in oil and gas is likely, and refilling European gas inventories will be materially more expensive than expected following the loss of a month or more of Qatari LNG. The key question is how much this uncertainty and higher energy cost will dent global growth and corporate earnings. With the risk of a prolonged semi‑closure of Hormuz, weakening US labour data, emerging liquidity issues in private credit, and equity indices still only a few percentage points below all‑time highs, we do not find the broad equity market risk/reward particularly attractive.
On the other hand, we believe the risk/reward in our energy transition universe has improved. In general, higher energy prices support alternative energy producers and energy infrastructure providers, granted a deep recession is not triggered. The closest analogue is the invasion of Ukraine in February 2022, when renewable energy stocks significantly outperformed as energy prices rose on the expectation that Russian oil and gas would be shut in. Russian oil production ultimately fell only marginally, but gas output dropped sharply, and European gas prices have never returned to pre‑war levels. This has benefitted renewable energy developers and the broader electrification industry.
There is, however, one crucial difference this time. In 2022, even though markets initially expected a short war, it was immediately obvious that Europe had to wean itself off Russian energy and become less dependent on external suppliers. Higher spending plans on renewables, permitting reforms and subsidy schemes improved the long‑term outlook for alternative energy in Europe and the US. Stock prices reacted accordingly, rising despite aggressive rate hikes as central banks battled inflation.
This time, the closure of Hormuz is widely seen as temporary, which is unlikely to trigger the same level of “call to arms” on energy security. Moreover, Europe benefits from the higher wind and solar capacity built the last years and from the fact that baseline demand has never recovered as power prices shifted to a higher level. Also important, policy rates are not near zero as they were in 2022. Even if a months‑long closure of Hormuz sends gas prices soaring and reignites inflation, the rate environment is unlikely to deteriorate as dramatically as in 2022, when the ECB and Fed hiked four and seven times, respectively.
Against this backdrop, we expect renewable‑energy related equities to perform relatively well as the focus on energy independence and new generation capacity increases. We are hopeful that grid infrastructure will receive at least as much attention as additional solar and wind capacity. The marginal value of new renewable generation is waning without parallel investment in the transmission and distribution grids. In addition, new AI‑driven tools are likely to push demand management and grid utilisation further up the agenda as power prices rise. Overall, we continue to prefer companies that build and own grid infrastructure to pure‑play wind and solar developers, many of which lack durable competitive moats and may soon end up on the receiving end of political interference to cap retail electricity bills.
Although power generators are the obvious beneficiaries of higher gas and power prices, we are somewhat sceptical. First, many have hedged a large share of near‑term production, and gas and power forward curves beyond 2027 have not moved dramatically, limiting the earnings uplift. Second, if power prices stay elevated, European governments will almost certainly intervene by capping household utility bills, as they did in 2022, triggering a multiple derating.
Third, several European governments want to revisit carbon taxes imposed on European power production. A sharp spike in power prices this year may provide the political cover needed to slow or partially reverse pre‑set carbon price increases into the 2030s. While we support carbon pricing in principle, we question the wisdom of rigidly pre‑programmed hikes irrespective of the competitive backdrop. Can Europe afford to have 50% higher power prices than the US and Asia?
Fourth, affordability was on the agenda in Europe even before the war started, and if power prices remain elevated for an extended period, the current merit‑order system for paying power producers may come under further scrutiny. Under this model, the marginal MWh needed to meet demand sets the clearing price, so low‑cost generators (hydro, nuclear, solar, wind) receive the same price as expensive peaking plants. A shift towards a pay‑as‑bid system would be negative for low marginal‑cost producers and for flexible traders who benefit from the volatility that the merit‑order system creates.
Finally, many utilities and renewable developers had acquired an “AI premium”, as investors assumed they would earn excess returns selling power to price‑insensitive data centre operators. We have always questioned how far European governments would allow retail power prices to rise purely to boost margins for some of the world’s most profitable technology companies. With power now likely to be scarcer in Europe over at least the next year, the opportunity to lock in very attractive long‑term data centre contracts is diminished.
By contrast, we see more attractive opportunities among US power producers. AI‑driven demand growth for data centres is far more pronounced in the US, with ample scope for opportunistic companies to offer behind‑the‑meter solutions and help hyperscalers “bring their own power.” If global power prices stay elevated and weigh on growth, the US is relatively better insulated as its gas and power markets are not directly tied to Hormuz’ energy flows, and as a net energy exporter, the US economy ultimately benefits from higher oil and gas prices. The downside is that higher gasoline prices imply a wealth transfer from consumers to producers, politically sensitive in an election year, and something President Trump is unlikely to welcome. Since the outbreak of the war, we have shifted more of our net exposure towards the US.
All told, while we hope the war ends quickly, we fear that higher energy costs will persist for some time. That is bad news for the global economy but should accelerate investment toward electrification and grid infrastructure, particularly in Europe, as governments seek to reduce external dependence. For our investable universe, this is clearly positive: the energy transition is no longer just about climate, it is about security, competitiveness, affordability and growth.