Rising Tensions in the Strait: Why Geopolitical Risks Are Fueling Energy and Defense Plays

The U.S.-Iran military standoff, now entering its second week, has thrust geopolitical risk to the forefront of global markets. Japan's delicate diplomatic balancing act—urging de-escalation while capping gasoline prices to shield its energy-dependent economy—underscores the fragility of regional stability. With 75% of Japan's crude imports transiting the Strait of Hormuz, a chokepoint now at the heart of Iran's retaliatory threats, investors are pricing in volatility like never before. This is a market moment for energy and defense plays, as fear of supply disruption and military spending surges creates a “risk premium” for companies positioned to profit.

The Geopolitical Backdrop: A Chokepoint on Fire

The U.S. strikes on Iranian nuclear sites have drawn sharp condemnation from global powers, but the real market threat lies in Iran's ability to weaponize its geography. Analysts warn that a closure of the Strait of Hormuz—a daily 20 million barrels of oil transit—could send Brent crude to $100/barrel, a scenario already priced into near-term options markets. Japan's preemptive move to cap gasoline at ¥175/liter highlights how vulnerable economies are to even minor supply disruptions.

Meanwhile, the U.S. military's ambiguous damage assessment—Gen. Dan Caine's “way too early” comment on Iran's nuclear progress—fuels uncertainty. This ambiguity is a catalyst for investors to overweight sectors that thrive on instability: energy for its price spikes, defense for its budgetary tailwinds.

Energy: Betting on the Strait Effect

The energy sector's playbook is straightforward: geopolitical tension = higher oil prices. Current conditions mirror the 1990 Gulf War, when energy stocks surged 25% in six months. Today, Inpex (1605.T), Japan's largest oil explorer, stands out. Its projects in the Caspian and East Africa position it to capitalize on diversification away from the Strait of Hormuz—a trend now accelerating.

As of June 2025, Brent has risen 7% in a week, testing $75/barrel. JPMorgan analysts see $100 as the next inflection point if Iran blocks the Strait.

Defense: The New Cold War Cash Cow

Defense contractors are beneficiaries of a geopolitical “double whammy”: rising military budgets and investor flight to “hard power” equities. The U.S.-Iran conflict has already seen Israel's Iron Dome sales surge, but U.S.-listed firms like Lockheed Martin (LMT) and Raytheon (RTX) are the primary beneficiaries of a global arms race.

Lockheed has outperformed the S&P by 18% since Russia's Ukraine invasion—a preview of what broader Middle East tensions could unlock.

Historical Precedent: Geopolitical Risk ≠ Just Energy

The correlation isn't new. During the Russia-Ukraine war, defense ETFs (like ITA) outperformed the market by 15%, while energy's gains were amplified by sanctions-driven supply gaps. The 2022 Dutch TTF gas price spike (ninefold in a year) showed how even non-oil energy assets can boom in crises. Today's Iran-U.S. dynamic is a textbook repeat, with uranium miners (e.g., Cameco CCJ) also gaining traction as nuclear energy's strategic role is re-evaluated.

Risks and the “Peace Premium”

The flip side: A sudden ceasefire or diplomatic breakthrough could trigger a sharp sell-off. Investors must balance exposure with hedging. Inverse energy ETFs (like DWT) or volatility contracts could cushion downside.

Investment Thesis: Position for the Strait's Stranglehold

1. Energy Plays:
2. Buy Inpex (1605.T) for its geographic diversification and Japan's yen-denominated dividend appeal.

3. Overweight oil ETFs (XLE) and consider long-dated Brent futures options.

4. Defense Bet:

5. Accumulate Lockheed Martin (LMT) and Raytheon (RTX), which have 90%+ exposure to U.S. military budgets.

6. Consider aerospace ETFs (ITA) for broader exposure.

7. Hedging:

8. Use inverse energy ETFs or VIX options to protect against a sudden de-escalation.

Conclusion: Time is Now

The Strait of Hormuz isn't just a geographical chokepoint—it's a financial one. With Iran's threats credible and Japan's economy on edge, the risk premium for energy and defense is here. History shows that geopolitical volatility rewards investors who act early. This isn't just about oil prices or missile contracts; it's about betting on the sectors that survive—and profit—when the world feels less safe.

Act before the next headline.