Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.

Growing risks from Iran and the impact on your portfolio

Hopefully this is a completely wrong assumption but it would appear that a military confrontation with Iran is not a question of “if” but “when.”

This past week in North Carolina the U.S. Marines started an amphibious assault drill against an enemy that resembles Iran. It involves beach landings, 25 naval ships, air assault, and eight other countries including Canada, France, and Britain.  The drill dubbed Bold Alligator is the largest amphibious exercise conducted by the fleet in the last 10 years. 

Obviously this has been planned for months but it times with two important recent events:

1) Feb 3rd – Iran’s Supreme Leader Ayatollah Ali Khamenei publicly stated they will help anyone willing to "cut out the cancer" of Israel. He also told worshippers at prayers that the country will continue its controversial nuclear programme. He said Israel is a "cancerous tumor that should be cut and will be cut".

"From now on, in any place, if any nation or any group confronts the Zionist regime, we will endorse and we will help. We have no fear expressing this."

2) Feb 7th – Al Arabiya news agency reports that Iran is expanding uranium enrichment deep inside the Fordow underground research facility (which cannot be reached by existing bunker buster bombs). The previous month Iran confirmed it was refining uranium to a fissile concentration of 20 percent at Fordow. In theory Iran could have a nuclear weapon within six to 12 months. 

On February 5th Alireza Forghani, head of the Supreme Leader Ayatollah Ali Khamenei's strategic team, was quoted as saying, "It would only take nine minutes to wipe out Israel." – something that can obviously be accomplished with a nuclear weapon.

The remarks followed the publishing of a paper by an Iranian study group who advised Tehran not to wait to be attacked, but launch a pre-emptive strike against Israel.

These remarks are common rhetoric from North Korea but must be taken very seriously coming from Iran who has the technology and serious intent (not to mention the hatred for Israel).

It is hard to imagine any country taking the path that Iran appears to be on and it is very sad for a large majority of residents who I am sure do not share these same views of hatred.

Today it is rumoured that a large public demonstration was going to occur in Iran on Saturday but we now hear that the Iranian government has shut down the Internet. People have no access to email or social networking sites so other than text (which may also be shut down soon) they will find it difficult to organize. The government appears content to alienate their own people and the outcome of this is never good.

Friday the following is also being reported in the region

“Military sources report that flight after flight of U.S. warplanes and transports were to be seen this week cutting eastward through the skies of Sinai on their way to Gulf destinations, presumably Saudi Arabia, at a frequency not seen in the Middle East for many years.”

“A successful joint exercise carried out Friday, Feb. 10, demonstrated the interoperability of the U.S. Aegis and Israel's Arrow 4 ballistic missile defense systems and, most importantly, of their radar systems.”

Potential global economic impact of a war with Iran

Previous studies have shown the following:

1) 70% probability it will lead to market declines of 0 to 15%

2) 20% probability of 15% to 30% declines

3) 10% probability of > 30% declines

The most extreme effects are on markets in the region including the European nations. Net oil importers are also severely affected.

Not surprisingly we would see a significant rise in the price of oil and gold and a likely fall in the U.S. dollar.

Some forecast that oil could rise above $200 per barrel but likely that would be short lived. A lot would depend upon naval warfare and how it affected the Strait of Hormuz or cargo ships in the Gulf, who could fall victim to fast moving Iranian missile boats.

A jump in oil drives fuel costs higher and hurts global economic growth. From an equity perspective this helps oil production and exploration companies, service companies, and alternative fuel companies (including lithium).

Significant volatility is created in financial markets and it creates the risk of stock market crashes.  This is also fueled because world trade can be affected.

Depending upon the extent of a confrontation, military spending can increase dramatically.

The instability of oil supply from the region means oil supply from other countries takes on greater importance – Canada and Russia for example.

Gold takes on greater importance as we typically see a flight to safety and a way to play rising inflation. This would benefit gold producers big and small plus the junior exploration stocks.

For the TSX and TSX.V, who are very heavily weighted to gold and oil, any war with Iran is an oddly positive event.

Portfolio strategy

As disturbing as all of this is, there are far too many events converging right now that we should be turning a blind eye to it.  The big problem is one of timing.

If this is resolved diplomatically (which is doubtful) then a person became overly cautious and risks missing out on potential stock gains. The first five weeks of 2012 have been good for equities (both big and small) and the economic outlook is half decent. One would hate to become too risk averse.

There are several ways a person could protect their portfolio against a market decline associated with Iran and there are several ways to gain broad based exposure to oil or gold – either through small stocks, ETF’s, or option strategies.

We will work on this over the next week and address some specifics in next Friday’s Ticker Trax report and also on Mondays with paid subscribers.

Disclosure: N/A