It is already old news, Trump has announced that the US will withdraw from the Iran nuclear deal and restore sanctions, is this a game changer from a political, economic and eventual investment perspective?
I will start with what will ultimately represent the longest term impact of the decision: Credibility! Credibility! Credibility! Pulling out of the deal will strain relationships with the US’ main allies, such as France and Germany, but also, the consistent breaching of agreements and threats by the Trump administration is sending the message that the US is no longer a reliable partner. This argument is especially true when it seems that Iran was doing exactly what is was meant to do.
Trump seems to be treating every other country as second class. To be fair, he has always stated his America first doctrine. Now the world is coming to the realisation that he means it, and that it really essentially means that everyone else comes second, a distant second. While admittedly the US may be the greatest military and economic power the world has ever seen, the reality is that foes and friends alike will very grudgingly give anything away unless they get something in return. And if they gang up, or are forced to gang up, even the mighty US can be overwhelmed.
It does not take much to understand Donald J Trump, just read his book ‘The art of the deal’. Basically, Trump encourages bringing your counterparty to his knees before meeting at the negotiating table. While Trump seems to be attempting this game on the international stage, I do have considerable doubts on its effectiveness against the like of Xi, Putin and Rouhani. Even the ‘childish’ Kim may be hard to crack.
Then there is the effects on international markets. Oil prices have risen 14% this year, most of it probably reflects stronger global demand. However, heightened tensions with Iran and other supply shocks will without doubt impact expectations on the market. If oil continues to increase due to demand increases, OPEC will likely match the increase in demand with an increase in supply. However, if supply is constrained, especially through sanctions, the loser will be economic growth.
European equity markets can also come under strain if European firms servicing Iran are sanctioned as well. At the time of writing it is unclear whether this will be the case.
Meanwhile, Iran has pledged to counter any move by the US administration while seeking constructive relations with the world. Iranian Supreme leader Ayatollah Al Khamenei is surely vindicated when he had shown reluctance to back the deal because ‘the west will not keep their word’.
From an investment perspective, when Europe seems to be making a comeback, when global growth has once more gained its footing, Donald Trump has once more placed another proverbial spanner in the spokes. Trump complained that the deal did not address Iran’s ballistic missile program, its nuclear activities beyond 2025 or its role in conflicts in Yemen and Syria.
But the deal was designed to prevent Iran obtaining a nuclear bomb potentially destabilising an already fragile regain. A collapse of the deal will on strengthen the hand of hardliners at the expense of reformers in Iran. Trump’s decision may be the first hand being played in this game, I sincerely hope that he has a good deck of cards, because Iran are certainly going to call his bluff and I wouldn’t be surprised if even friends will start to turn their back on him.
Disclaimer: This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.