- The US and Iran have agreed to a two-week ceasefire, easing investor concerns.
- But UBS highlights risks in the ceasefire, including potential disruptions in the Strait of Hormuz.
- UBS suggests opportunities in US utilities, healthcare stocks, and high-quality bonds.
Investors were jubilant on Wednesday following news that the US, Israel, and Iran had agreed to a two-week ceasefire and a reopening of the Strait of Hormuz. But markets are not yet in the clear, UBS warns.
Stocks ripped on Wednesday, with the S&P 500 and Nasdaq 100 rising 2.5% and 3.1%, respectively, by mid-afternoon.
There is indeed plenty to be optimistic about, UBS said in a report on Wednesday.
The drop in oil prices following the ceasefire announcement should ease upward pressure on inflation and downward pressure on growth, and the progress shows a true interest from both sides to de-escalate to the conflict.
But the bank reminded investors that risks surrounding the ceasefire remain, pointing to five in particular.
Most of them concern the reality that the flow through the Strait will not return to pre-war levels right away.
For one, many ships have simply left the area and need time to return.
Second, the ceasefire is only set to last two weeks, and the closer that deadline comes, the more shipping firms could second-guess sending their tankers through the Strait.
Third, there's no guarantee that Iran and its military personnel will uphold the deal, either regarding the ceasefire or keeping the Strait open.
"Any individual strike on a passing vessel could unravel progress. With this in mind, it is crucial that all armed members/units of the Revolutionary Guard adhere to the ceasefire. A breakdown of internal order within Iran presents a potentially uncontrollable longer-term risk to energy flow."
On Wednesday, Iran appeared to again be blocking the Strait, saying it viewed Israel's attack in Lebanon as a breach of the ceasefire deal. As markets moved toward the close, Mohammad Bagher Ghalibaf, the speaker of Iran's parliament, said that the ceasefire agreement had been violated.
Fourth, UBS said it's also unclear who will control the Strait going forward, whether the US will have any stake in doing so, or whether Iran would charge tolls for passage. These issues could cause negotiations to stall, the bank said.
Lastly, Iran's nuclear ambitions, sanctions, and US security guarantees are likely to be points of friction in the negotiations, UBS said.
How to invest
UBS said that while long-term investors should stay put, short-term investors might look to corners of the US market, as well as Switzerland and some emerging markets. Under the surface of the broader market, it said there are opportunities in US utilities stocks, industrials, and healthcare stocks.
Outside of stocks, the bank said investors should look at high-quality bonds of short- and medium-term duration, as they could get a boost from rate cuts down the line. The bank's analysts also like gold, which they believe has 23% upside from current levels.
"Gold prices remain well below where they were at the start of the conflict," UBS said. "Over the medium term, if the market shifts toward pricing less risk of rate hikes, while geopolitical and fiscal risks stay high, we would expect gold prices to rise again. We target USD 5,900/oz by year-end and see the metal as a valuable portfolio hedge."
Some examples of funds that offer exposure to these trades include the Vanguard FTSE Emerging Markets ETF (VWO), the Fidelity MSCI Utilities ETF (FUTY), the iShares Global Healthcare ETF, the iShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB), and the SPDR Gold Trust (GLD).
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