Galaxy Macro: Who Is a Friend of Time? — The U.S.-Iran Conflict Narrative and Asset Allocation Outlook

Source: China International Capital Corporation—Macro Research

Key takeaways

Based on a decision-tree scenario analysis driven by the U.S.-Iran conflict, we believe that the war risk has not yet settled, and the trajectory of the conflict still carries substantial uncertainty. The core assumption is that if, at this time, the United States resolves the navigation issue in the Strait of Hormuz through a TACO-style approach, it would amount to admitting the restructuring of the geopolitical order in the Middle East—an outcome that would deal a major blow to both Trump’s credibility and the petrodollar system. Next, the United States may continue to strengthen its deployments in the Middle East, seeking more negotiation leverage through even more forceful military suppression, and it is also not ruled out that the Trump administration could choose ground operations.

One possibility is that after the U.S. military increases its ground-force deployments, it would launch more effective strikes against Iran’s homeland. After the three sides between the U.S. and Iran have incurred high-intensity attrition and consumption, and under the mediation of other countries, the situation could return to the negotiating table once again. Crude oil is the world’s cost, global interest rates, and an important soft spot for the United States at this stage; Iran therefore has the incentive to raise oil prices to secure a better negotiation outcome.

Another possibility is that the impasse in the high-pressure confrontation between the U.S. and Iran can never be broken. The United States then begins to mass troops for amphibious landing operations on a large scale, and the situation may further evolve into an “Iraq War” pattern or a “Vietnam War” pattern. The former offers a chance to achieve limited navigation through the Strait of Hormuz, and the oil-price center could move from the prior level to add a security premium; the latter, against the backdrop of elevated U.S. deficits and high yields on U.S. Treasuries, could create even more destructive impacts on global capital markets.

In this conflict, who will become a friend of time?

Resource powers, represented by Russia and Canada, have the most direct upside. The Strait of Hormuz navigation issue, combined with the recurring damage to Middle East oil and gas infrastructure, will weaken the Middle East region’s energy export capacity over a relatively long period. The rise in the price centers of traditional energy sources such as crude oil and coal will quickly improve current-account revenues and fiscal conditions in countries such as Russia, Canada, Australia, and Norway.

Israel can gain more favorable outcomes under this round of reshaping of the regional geopolitical order. This round of the U.S.-Israel-Iran conflict has already spilled over into most countries in the Persian Gulf. The Middle East harmonious setup that China worked hard to build in 2023 has been severely disrupted to a great extent. Israel is a net exporter of natural gas, and its import-export trade has a lower dependence on the Strait of Hormuz, making its economy relatively more resilient. After this round of conflict, Israel’s influence in the Middle East may be further strengthened.

China and ASEAN will play a positive role in stabilizing the global industrial chain and supply chain. China has the world’s most resilient industrial production system, and its forward-looking energy-security strategy also gives China relatively ample coal and clean-energy capacity to offset tightness in crude-oil supply. Chinese exports are therefore expected to maintain a favorable momentum. Meanwhile, the U.S.-Iran and Israel-Iran conflict will not only change the crude-oil supply pattern, but also reshape the flow directions of global oil products, shipping, and warehousing systems. In this process, countries such as Singapore and Malaysia—capable of functioning as transshipment, refining, blending/mixing, warehousing, and regional trade hubs—are expected to benefit from supply-chain restructuring.

The United States and Iran are likely to be the main losers after the conflict becomes long-term. Iran bears a more overt consumption of national power. Regardless of the final outcome, its industrial production capacity and energy infrastructure construction will still require a long recovery period. For the United States, the issue lies in: “it can afford to fight, but it may not be able to sustain the cost; and it also cannot afford to lose.” Against the backdrop of high deficits, high interest rates, and domestic political fragmentation, continued fiscal spending stemming from Middle East military actions, economic stagflation, and anti-war sentiment will weaken the United States’ international reputation and influence.

There are three layers of impact on the capital markets.

In the short term, as long as the trajectory of the conflict remains unclear, risk-avoidance sentiment will continue to dominate. It is not ruled out that, once again, a liquidity shock could force the possibility of a Trump TACO.

In the medium term, it is necessary to consider how the upward shift in the inflation center affects fundamentals and monetary policy. Rate cuts by the Federal Reserve and the People’s Bank of China will be even more discretionary.

In the long term, compared with fiscal deficits, the world will place even more emphasis on “security deficits.” In the future, countries may make greater efforts in “coordinating development and security,” and construction needs such as energy security, food security, industrial chain and supply chain security, defense security, and cybersecurity will be significantly boosted.

Risk warning: risks of an overseas economic recession; risks of intensified trade frictions; risks of sudden geopolitical developments.

Main text

1. Core judgment and decision-tree scenario analysis

After Iran blocked the Strait of Hormuz on March 2, the nature of the situation changed fundamentally. Iran began to actively touch upon the core interests of the global energy transportation system and the United States’ maintenance of order in the Middle East. For the Trump administration, this means it rapidly falls into a dilemma: on the one hand, the United States can hardly tolerate the Strait of Hormuz being blocked by Iran for a long period, because that would effectively concede the fact of the Islamic Revolutionary Guard Corps gaining de facto control over this global energy passage; on the other hand, relying solely on remote strikes obviously would not be enough to force Iran to restore passage through the strait. Under these circumstances, “opening up the strait” becomes the U.S. military’s most important strategic goal at present.

The Trump administration has clearly shifted to a strategy that runs military pressure and negotiation probing in parallel. In its most recent public remarks, Trump said that the United States is in contact with Iran and claimed that the relevant communications are “productive.” At the same time, it pushed the timing of follow-up strikes that were originally more hardline back by several days, or even by a month, to leave a window for negotiations and mediation by intermediaries. Pakistan, Turkey, Egypt, and others have already participated in relaying messages and mediating. At the same time, Iran has not acknowledged direct negotiations with the United States; it only acknowledges contacts via intermediaries and has proposed higher conditions such as a ceasefire, compensation, and future security guarantees. It should be noted that the military conflict between the two sides is still ongoing: the United States continues to deploy troops to the Persian Gulf region, while Iran continues firing missiles at Israel. Therefore, the current situation can be described as a “half TACO” by Trump—closer to a new stage of “fighting while negotiating, using pressure to push for talks, and stabilizing markets through talks.”

Against this backdrop, the choices facing the Trump administration should also be revised accordingly. We believe that the current path of “limited special operations → partial seizure of control → deciding again whether to upgrade into large-scale ground operations” has not been ruled out. However, a more realistic baseline scenario is that the United States continues to maintain and strengthen its military presence in the Middle East, treating troop increases, escorting missions, deterrence, and strike preparations as negotiation leverage rather than immediately switching to a comprehensive ground war. On the one hand, it continues to preserve the capability to escalate at any time, in case Iran normalizes the blockade of the strait; on the other hand, through contacts via intermediaries, it seeks to force Iran to accept some limited arrangement without fully committing itself on the ground.

Therefore, there are three possible scenarios for subsequent developments. The first scenario is that the U.S. and Iran reach some sort of stage-based arrangement through intermediary contacts—for example, Iran would under strict coordination allow limited easing of navigation through the strait, while the United States would temporarily delay further strikes, and the situation would enter a stage of partial cooling under high-intensity standoff. The recent market’s optimistic reaction to the “negotiation window” suggests that the probability of this scenario has risen compared with before. The second scenario is that negotiations never reach the core disagreements, with Iran continuing to maintain deterrence through the strait, missiles, and regional proxies, while the United States continues to add deployments and prepares for small-scale landing operations. The third scenario is that after both of the first two fail, the United States returns to a path of large-scale escalation, including preparations for broader military strikes and even ground operations.

Judging from the negotiation demands of both sides disclosed by the media, the probability of reaching an agreement in the short term is low. Reuters cited senior Iranian officials as saying that Tehran is willing to consider talks, but with conditions: first, the formal end of the conflict/ceasefire; second, assurances that the United States and Israel will not launch further military actions; third, compensation for losses caused by the war; and fourth, Iran’s retention of control or a leading arrangement over the Strait of Hormuz. At the same time, Iran has clearly stated that it will not accept limits on its ballistic missile program, and it refuses to negotiate with the U.S. president’s special envoy, Witkoff, and Trump’s son-in-law, Kushner. It only acknowledges negotiations through intermediaries such as Pakistan, Turkey, and Egypt. Separately, an Associated Press report said the U.S. side submitted a 15-point ceasefire proposal to Iran through Pakistan, roughly covering: issues including lifting sanctions, abandoning the nuclear program, missile limitations, reopening the Strait of Hormuz, and Iran stopping support for armed groups in the region. The negotiation demands of both sides differ greatly.

Therefore, the last two paths remain possible. In the special operations path, the United States has already moved two fleets in sync. Around March 13, the United States deployed about 2,500 Marines stationed in Japan, using the amphibious assault ship “Tripoli” to maneuver toward the Persian Gulf, and it is expected to complete deployment by late March. On the 20th, U.S. media reported that the amphibious assault ship “Guns” (Pugilist) (“The Boxer”/“Wasp”?), the dock landing ship “Constock” and the amphibious dock transport ship “Portland,” together with about 2,500 Marines, departed from San Diego, California, and need three weeks to arrive. Therefore, while the Marines are still en route, the U.S. may hope to use negotiations to buy time.

However, it is necessary to see that a force size of 5,000 personnel is clearly not enough to directly land on Iran’s homeland, let alone achieve systematic suppression of the Islamic Revolutionary Guard Corps. A more realistic assumption may be to choose limited targets to seize control in order to create “localized victories.” From a geographic and tactical perspective, there are two more likely targets: first, Qeshm Island and surrounding islands—this area controls the Strait of Hormuz and has strong significance for strait control; second, Harg Island, which is an important hub for Iran’s oil exports. The island is small, but has outstanding strategic value. If it is lost, Iran’s oil export capacity would be further weakened. Trump may want to use control over targets like these as leverage for negotiations with Iran. This thinking better matches