The Iran Economic Shock is Coming. How to Protect Yourself

Headlines are screaming at us about US-Iran tensions, and right now millions of investors are asking the same question: should I sell everything, buy oil, or abandon ethics and go all in on defense stocks? After all, the US has built up its largest military presence since the start of its 2003 invasion of Iraq. Iran has hit back, shutting down vital shipping routes, firing missiles towards military and civilian targets in the Gulf. And with Trump saying the conflict could last far longer, despite analysts predicting it'll only blow over in a week or two, the threat is far from contained, which means that by the time you watch this, the situation might well have changed, but the way you navigate your portfolio through conflict won't have. Because when volatility rises in the fog of war, investors make the same mistakes. If you're new to the channel, I'm James Helliwell. I'm a former professional trader turned financial educator, and in this video I'll show you how to protect your portfolio from the threat of war, why the most obvious trade is often the wrong trade, and how you can profit from the conflict ethically without sponsoring the military-industrial complex. And there'll be a link in the description if you want to get my watchlist with all of the ideas that we'll be looking at here today. It's completely free. Now, when people hear war and Strait of Hormuz, the first thing that they rush to is oil. And Hormuz is a real choke point because 20% of the global oil flows through it, and Iran has formally closed it. Tankers are being hit, and over 200 vessels are being anchored offshore now, just waiting to see what happens. But whilst the situation is clearly evolving, Analysts at the investment banks actually see this as a short-term event rather than a structural supply shock. Global inventories are at healthy levels with around 74 days of demand even in the worst-case scenario, and the base case from Citi is a resolution within a couple of weeks. And this is why the most obvious hedge might well be the worst hedge, because unlike shares in BP or ExxonMobil, oil itself is a tactical instrument, meaning it can spike violently and then mean revert violently. And you can see that taking place on this 50-year history throughout various events, the Gulf Wars, Saudi, Russia's invasion of Ukraine, of course, and so on. Volatility has been created, but the price shifts only tended to stick higher when the supply was permanently disrupted, not simply threatened as the bankers seem to think now. And even then, energy markets are usually able to adapt and snap back pretty quickly, and that reduces the risk of a surprise event that will cause a persistent imbalance between supply and demand. At least that's what the optimists would say. So this chart might actually help us understand it a bit better. It's basically the fear gauge for oil, a bit like the VIX index is for the stock market, and it measures how much the oil market is likely to swing around. And if you look at the overall shape, what you'll see is that there's a series of spikes that tend to see it revert to a baseline. That's the key pattern here. And right now, with these countermeasures on the table, the SPR releases I mentioned, and Citi still being adamant that this will be short-lived, the market's not pricing this in as a structural problem. And if you get involved in this and you miss the spike by even a week, you're then left holding something that's already reversing. So unless you are literally a commodity trader, which I'm certainly not, you're just asking to get chopped up. So if our goal is portfolio protection, not gambling on the headlines, We need something we can actually hold as protection throughout the cycle. So let me show you how to do that with businesses that have steady structural demand in this increasingly risky world that we seem to find ourselves in. Firstly, we need to put any personal opinions and ethics to one side, at least just for a moment, because when geopolitical risk rises, defense spending usually follows. We're talking these massive contracts here that can take months to negotiate and even years to fulfill. And most people know this, but there's a problem with how most people approach it, because they see the headlines and assume that it must be a one-way bet. Probably get caught up in the noise on social media about the military-industrial complex, whatever Russell Brand's been banging on about, or they just buy the defense ETF. But either way, whilst they're getting exposure, they're probably not going to get the outcome that they expect. So let me show you how to avoid buying the wrong stocks in the right theme by backing the best companies in the sector. And you can see the boon that it was for European defense companies since Russia's invasion of Ukraine. The index has more than trebled, I think, over this period. And even in 2025, as Germany said that it would be spending €1 trillion in infrastructure and defense, it gained a further 50%. So you can think of this in two ways. You've got rearmament stocks, companies like Raytheon and Lockheed, which deal with missile interception mainly. At low altitude, you've got Raytheon's Patriot interceptor that also deals with drones. And at higher altitudes, you've got the THAAD interceptor, which is Lockheed's technology, which deals with ballistic missiles. The other segment is in infrastructure. So of course, this is more the communications and the technology, and also the big naval destroyers in the case of General Dynamics. I'm not going to pretend to be an expert in any of these, but it's good to have a feel for what these guys are about. So what I want to do is run each of these companies through the very model that I otherwise apply to the entire stock market to determine which companies are better than others. We'll begin by looking at the rearmament trade, so Lockheed versus Raytheon. You can see Lockheed in blue with a much wider footprint than Raytheon in white. So what this tells us is that Lockheed has vastly superior efficiency It has better profitability, it has better growth, and yeah, the valuation might even be a bit better as well. So it's very clear to see that it's most likely, according to my model, the superior company. But let's take a look through the fundamentals to validate that. You can see the growth trend here, that's in sales of course. So these massive multi-billion dollar contracts that it's a beneficiary of. Free cash flow, it's not quite as impressive. It has dipped a couple of points. But overall it does generate a large amount of free cash. With that said, it's perhaps not as impressive when it comes to efficiency, at least compared to the companies that I'm used to looking at more broadly across every sector, because the return on invested capital at about 13 or 14%, as we see here, is not so high. It's around the same as the general stock market. I like to find companies that ideally are mid-teens and going towards 20% plus if possible. When it comes to the valuation 22 times free cash flows, a little bit above the median. So there's nothing here that really excites me, although it's clearly a better alternative according to my model to Raytheon. In terms of the 10K growth, well, I guess this validates what I'm saying. Whilst it may appear as though there's been less volatility in the purple line, which is Lockheed, it's returned the same as the S&P, but in fact it lagged it for long periods of time. So you wouldn't have added any value in investing in the defense sector long term. And it's not this magical negative correlation that means that defense stocks will always rise when the S&P's selling off and vice versa. But turning to infrastructure, let's do the same comparison this time between General Dynamics and Northrop Grumman. And it's a little trickier to separate here. You can see that there are definitely strengths in terms of profitability. The valuation, which we'll see at the end, looks pretty good as well. For General Dynamics, but the growth, the reinvestment, and the efficiency profile for Northrop does appear to be superior. But I want to view these side by side on a relative basis. We can see the free cash flow in blue for General Dynamics appears to have both a superior level and trend to that of Northrop. Northrop's been a little bit more undulating, shall we say. Which is a fancy word for inconsistent. So we'd give that one to General Dynamics. However, when it comes to the return on invested capital here, we can see that the median for Northrop is higher than the median of 8.5 times for General Dynamics, which actually is pretty pathetic. As I just explained, 13.5% for Lockheed didn't exactly excite me. 8.5% is well below the S&P 500, the average company. It's below average. And for Northrop, I mean, it's not even 11%. And when it comes to growth, there's not a great deal in it either. You can see compound growth in sales of 6.2% for General Dynamics compared to 6.1% for Northrop. It's basically the same, similar kind of trend, similar kind of companies with similar kind of contracts. There's not a great deal to get excited about here. Now, when it comes to valuation, if we're trying to split hairs, you can see that Northrop in white has generally traded at a premium to General Dynamics, which might suggest that it has better prospects. It's the market's rating of that company's future compared to its peers. And we can see a little divergence taking place now, but basically the two have kind of converged and there's not a great deal in this. So what we should do is look at the stock relative to its own historical multiple, slightly elevated 24 times versus 21. There's not a great deal to take from that. And actually, It's the same kind of story with Northrop, 31 times versus 27, a higher absolute number, but relative to its own history, it's kind of the same. So what I'd do here, I'd probably just give the edge to Northrop slightly, but neither of these companies that we've looked at, Lockheed and Northrop, actually excite me. And when you see the return compared to the S&P 500, the best defense stocks would barely have beaten the market. But that's not the only reason that I actually wouldn't invest in them. Because there's the very obvious question here of ethics, which you may or may not share, but for the first time in my 15 years of investing, I just can't bring myself to ignore it. It's not a virtue signal, and I wouldn't judge you otherwise if you feel differently, but the more I see how these narratives are engineered by politicians that I have zero respect for, the less I can believe in these wars as being at all necessary. So let me show you how you can still protect your portfolio during volatility and get better returns without owning any of these defense companies with all of their ethical complications. So returning to the same examples of Northrop and Lockheed, but this time compared to the quality ETF, you can see they haven't outperformed quality either. And here's why. If you look at the side-by-side comparison of the defense names that we've just seen, this being the average here compared to the top quality stocks across the entire universe that I follow, none of which are in defense, then you can see how the footprint is much broader, meaning that these companies outside of defense are way better investment opportunities than the defense sector itself. You've got companies like Fortinet, which may be an indirect beneficiary of increased geopolitical tensions. It's a cybersecurity leader. It's meant to ensure that supply chains are secure, which of course was a big problem, particularly as the Russia-Ukraine conflict began to see commodity prices, you name it, go haywire. A $10,000 investment 10 years ago would have returned over $180K compared to less than $40K for the MSCI World. And you've got companies like Mastercard, as vanilla as it gets. You don't need to be in anything exotic, and you certainly don't need to be in companies that profit from war, the military-industrial complex, in order to make money. This has got to be one of the broadest footprints and therefore best quality stocks you can find an example of anywhere in America, and it's once again reflected in the return, returning multiples of the MSCI World. So if you look at the top quality stocks compared to the top defense stocks that we've just seen in Raytheon and Lockheed, there's a huge chasm there. Quality overall, the best companies within the entire universe, have more than doubled the return of these defense names, which means that there's no reason for you to invest in them. Like I said earlier, there's a link in the description if if you want to get your hands on the watchlist report going into more detail of each of these companies that I've just mentioned according to my model. But to reiterate, this is the same process that gets you a better outcome without the ethical considerations, at least as it relates to war, because it is still capitalism after all. But capitalism is what I have to thank for every opportunity it's given me in life to be here today, safe, able to follow my passion and put together this video for you. And if you found this useful, then check out this video next, which YouTube thinks you're going to love. Take it easy.