We have been very clear in our messaging since late last year and in recent weeks that Israel / U.S. will attack Iran and that it will likely be on a Friday night or over the weekend. Despite being mid negotiations with Iran, the U.S. and Israel undertook targeted attacks which have, as widely reported, claimed the life of Iran’s Supreme Leader Ali Hosseini Khamenei. What comes next and what should investors consider? We discuss key points below.
U.S. / Israel wants a regime change
Regime changes are notoriously difficult and often leave a vacuum which leads to unintended consequences. In any case, we believe there is less than a 30% probability that we will get a clean regime change in Iran. We could be wrong, but we would be very surprised if Iran’s current regime did not have a succession plan in place. Khamenei was 86 years old and the threats to Iran have been steadily increasing (with the swift change in Venezuela serves as a good reminder). The question determining future stability in relations with Iran will depend on who takes Khamenei’s place; he may end up being more of a hardliner than Khamenei and try to accelerate the path to nuclear capability. Also keep in mind, Khamenei wasn’t just head of state, he also held an important religious position among Shia Muslims (estimated between 150-200 million globally) and therefore his assassination may unite the masses (certainly in Iran).
The conflict is spreading
Given U.S. bases across the Middle East – Qatar, UAE, Saudi Arabia, Jordan – Iran has retaliated by attempting to bomb U.S. bases in these countries. This obviously breaches the sovereignty of these respective countries. This invariably drags the rest of the Middle East into this conflict, given that Iran is unlikely to hold back attacking these bases if it considers the current attack an existential threat.
#Market implication 1 – Conflict to continue for days/week
Given Iran’s attack on neighbours and Israel have continued, this suggests to us succession plans were already in place and that IRGC (Islamic Revolutionary Guard Corp) is likely to be in control of decision making. Israe/U.S. is likely to continue to attack Iran to achieve a clean regime change. We think this will keep the markets on edge and therefore expect volatility to remain high as uncertainty reigns. Therefore, we would not be jumping into the markets indiscriminately.
#Market implication 2 – Impact on global oil supply
Shipping disruptions to global oil supply will be a key risk investors will be watching. Given the U.S. has is specifically targeting a regime change, it is then natural to conclude this is not one strike and done operation. OPEC has announced plans to increase production, but we see the potential of damage to oil infrastructure in the Middle East from Iranian attacks as a material risk. A spike in oil prices will drive further volatility in equity markets.
Data centre investment in the U.S. supports cyclical momentum
The chart below provides a great picture of the surge in data centres investment in the U.S. over the past 3-4 years. Given the strong demand for computing power, companies have looked build out the digital and cloud infrastructure. But as we have done in the past, we have continue to highlight the potential risks here – (1) firstly its been a key driver of investment and hence any moderation in the pace of this investment could be negative economic growth; and (2) these are very capital intensive investments and the companies building out data centres often have very high financial leverage – which could be a dangerous recipe if demand moderates or worse declines due to a economic shock.
China economic pulse
China’s economy expanded +4.5% y/y in 4Q25, the slowest pace since the reopening from Covid lockdowns in late 2022, equating to 2025 growth of +5% y/y, meeting the government’s target and matching the expansion in 2024. Consumer spending and business investment remained sluggish as a weak jobs market and falling home prices weigh on domestic demand. As we have been outlining over the recent weeks, leading indicators for China appear to suggest the economy is lacking momentum, despite financial conditions remaining easy. This is neatly summed up in the chart below.
