The Iran conflict is creating a new problem for Canadian investors

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Photo by Fatemeh Bahrami/Anadolu via Getty ImagesFor much of this year, investors have been fixated on artificial intelligence and the resilience of North American equity markets. Meanwhile, bond markets have been flashing warning signals about concerns over sovereign debt, higher borrowing costs and growing geopolitical uncertainty.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountThe most significant development behind these trends is the ongoing conflict involving Iran. While it appears that many investors continue to view the situation primarily through the lens of oil prices, the implications are much more than this, as it is increasingly influencing government finances, global capital flows, investment decisions and even trade relationships.For the past several years, investors have largely assumed the United States artificial intelligence buildout would have access to virtually unlimited funding. For decades, Middle Eastern nations recycled energy revenues into global financial markets through sovereign wealth funds, infrastructure investments, private equity, venture capital and real estate. These pools of capital became important funding sources for Western economies, including many of the growth initiatives currently driving U.S. equity markets.Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try againHowever, what happens when the countries that traditionally supplied this capital begin consuming it themselves as a direct consequence of the U.S.-Iran conflict?Governments across the Gulf have ambitious domestic spending programs, economic diversification strategies and infrastructure projects that must now compete with rising geopolitical and security costs. As a result, capital that once flowed into global markets is increasingly being redirected toward domestic priorities.Take Saudi Arabia for example. Despite elevated oil prices, the kingdom is in a large fiscal deficit position as rising costs associated with regional instability, trade disruptions and domestic investment commitments place increasing pressure on public finances. It is even reportedly exploring about US$8 billion in additional borrowing.This comes at a time many of the technology companies leading the AI revolution are spending at unprecedented levels — so much so that they simply don’t have enough cash flow to fund their buildout and have to turn to bond markets, especially since capital sourcing regions such as the Middle East are no longer available.AI-related corporate borrowing already makes up roughly 14 to 15 per cent of the total U.S. investment-grade bond market, which is significant and concerning, but it’s about to get a lot worse. JPMorgan Chase & Co. recently raised its cumulative global AI capital expenditure outlook to US$5.5 trillion by 2030. Out of the total anticipated spending, about US$4.1 trillion is projected to come directly from debt markets, including investment-grade and leveraged finance.This comes at a time when bond investors are demanding higher yields as a flood of new issuance is only beginning to hit the market. Making matters worse is that it’s not only AI companies at the trough. The U.S. government itself is having to refinance about US$9 trillion in treasuries, representing more than 25 per cent of its gross domestic product, that are maturing in less than one year.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.This dynamic may help explain why U.S. Treasury Secretary Scott Bessent has appeared increasingly concerned in recent weeks. He recently delivered some of Washington’s strongest comments to date regarding Iran, signalling a willingness to aggressively pursue sanctions enforcement against individuals, companies and financial networks perceived to be supporting the regime.Investors may dismiss such remarks as political rhetoric, but sanctions, financial restrictions and geopolitical realignment can influence capital flows every bit as much as central bank policy.This is where Canada enters the picture and the timing could hardly be worse given the rapid deterioration in Canada-U.S. trade relations.A recent Global News investigation revealed last week that the son of Iran’s former vice-president has received millions of dollars in Canadian government contracts despite being under investigation over allegations involving sanctions evasion and assistance to Iran’s missile program. The allegations have not been proven in court, but the optics are unquestionably problematic at a time when Washington is demonstrating heightened sensitivity toward Iranian influence and sanctions enforcement.Adding to the debate is Prime Minister Mark Carney’s recent appointment of Dominic Barton as chair of Invest in Canada, a decision that some observers believe will be closely scrutinized in Washington. Barton brings extensive international business experience and previously served as Canada’s ambassador to China. Supporters view the appointment as evidence of Canada’s desire to attract investment and strengthen international relationships. Critics, however, question whether the move sends the appropriate signal at a moment when Washington is taking an increasingly hard line toward both China and Iran.The level of global concern about political factors has become significant enough that the Dutch central bank (DNB) revealed last Wednesday that it had relocated 86 tonnes of gold from North America to the Bank of England in a months-long operation. DNB stated that holding the gold in London would allow it to be mobilized and traded more efficiently during a crisis. The move underscores growing unease over the recent escalation in tariff disputes between the United States and Canada following the collapse of trade talks.As you can see, the Iranian situation is about far more than just oil prices. AI infrastructure, government deficits, energy transition projects and defence spending are all competing for the same pool of money, while bond investors are demanding significantly higher returns to fund them.For Canadians, the risk is not simply what happens in the Middle East. It is whether Canada’s policy decisions create additional friction with the country on which our economy remains most dependent. If Washington concludes that Canada is out of step with its priorities on sanctions enforcement, national security or strategic competition, the consequences could extend far beyond trade disputes.Finally, for investors, perhaps it’s time to start listening to the bond markets and start taking some profit from these Big Tech hyperscalers and redeploying into more defensive positions — unless you think the U.S. will be able to resolve the Iranian situation sooner than later. But my fear is the damage has already been done and, in that event, that may demand repositioning portfolios for the new environment we are in.Martin Pelletier, CFA, is the author of Investing Through the Storm and a senior portfolio manager at TriVest Wealth, a team that is part of Wellington-Altus Private Counsel Inc. TriVest provides discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus._____________________________________________________________If you like this story, sign up for the FP Investor Newsletter.We apologize, but this video has failed to load.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.