These new realities of warfare have raised important questions about how nation-states will interact, as technologies such as drones may have effectively leveled the playing field. Throughout history, the balance of power has shifted between offensive and defensive technologies. During the 20th century, wealthier countries held a decisive advantage because advanced weapons—tanks, fighter jets, and aircraft carriers—were expensive and required lengthy procurement cycles. As drones become the defining technology of modern conflict, however, cutting-edge military capabilities are becoming accessible to a much wider range of countries, potentially emboldening more states to engage in conflict.
The conflict in Iran has also reshaped how investors view the Gulf states. Historically, the Gulf states have been a source of capital, but they are increasingly a source of investment opportunities. Some fear that the current regional conflict may be undermining the Gulf’s value proposition as a safe place to invest. The conflict with Iran has highlighted the need for investment in infrastructure, redundancies in water production and oil transportation, and missile defense. The need for pipelines to divert oil and gas away from the chokepoint of the Strait of Hormuz has become apparent.
This conflict has had several important economic consequences, highlighting the volatility geopolitics can cause. First and foremost, other oil-producing nations, including Canada, Venezuela, and Norway, have benefited by helping offset disruptions to the global oil supply. A second-order effect has been a renewed focus on the vulnerability of strategic chokepoints like the Strait of Hormuz, prompting investors and geopolitical analysts to examine other critical chokepoints. These include geographic routes such as the Northwest Passage, as well as economic chokepoints such as China’s dominance in rare earth mineral refining, Taiwan’s central role in semiconductor manufacturing, and vulnerabilities in global fertilizer and agricultural supply chains.
Finally, the conflict has underscored the growing difficulty of predicting and pricing geopolitical events. Ongoing challenges surrounding U.S.-Iran negotiations have provided little clarity on how or when the conflict and the associated disruption to global shipping may be resolved. As a result, investors are increasingly grappling with the prospect that the international community may not return to the pre-conflict norm of largely unrestricted freedom of navigation.
From an investment perspective, investing in defense companies has long been controversial, and some investors have categorically avoided it. However, recent global events have made defense investment seem more inevitable. In addition, defense investment is increasingly understood to include critical infrastructure such as ports, rail lines, manufacturing hubs, and telecommunications and cybersecurity technologies, which may be more palatable to defense-shy investors than traditional weapons procurement.
