UBS Global Strategy: Iran Shock and EM — Vulnerabilities, Hedges, and Potential Future Opportunities
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A potential closure of the Strait of Hormuz poses severe risks to emerging markets (EM), according to a recent UBS global strategy report. With roughly 20 million barrels per day of global oil supply transiting the strait, an active disruption threatens at least 10 million barrels daily. EM Asia is particularly vulnerable, accounting for 73% of the strait's petroleum traffic. India, South Korea, and Thailand rely on this route for 40–70% of their petroleum needs.
In foreign exchange markets, UBS recommends short positions in the TWD, IDR, MXN, and CLP, while maintaining tactical short exposure to the THB. Conversely, long positions are favored in the CNH, KRW, BRL, and HUF due to supportive unique factors.
Equity strategies favor Brazil, given its oil production growth and Petrobras's lower sensitivity to Middle Eastern disruptions. UBS is overweight Malaysia while exercising caution in India and Thailand.
EM credit spreads currently exhibit a 10-year high dislocation relative to the VIX, presenting an asymmetric risk-reward profile. In local debt, EM rate expectations have shifted dramatically, now pricing in 20 basis points of rate hikes over the next 12 months, a reversal from previously expected cuts. UBS maintains long positions in Brazilian 10-year and South African R2030 bonds, and highlights Hungary's rapidly improving risk-return dynamics. Should the conflict persist for 3–4 weeks, oil prices could temporarily breach $100 per barrel before normalizing to the low $70s.