Taking Stock 9 April 2026

James Lee writes:

“Most of life comes down to controlling what you can and putting guardrails around what you can’t.”

It sounds like a throwaway line but it wasn’t. It was a clear and coherent strategy.

I was sitting with the then CEO of Air New Zealand. We were talking about the realities of running an airline, arguably one of the most exposed business models in the world. Oil prices, FX, global demand, the economic cycle, even the weather are all out of your control.

So Air NZ hedged what it could - fuel, currency and capacity - then focussed relentlessly on the one thing it could control: brand and customer loyalty. The experience, the reason a customer comes back. (That was the edge, but perhaps Air New Zealand might revisit whether customer loyalty has been as much of a focus recently.)

But let’s be clear, the definition of “controllable” shifts when the world shifts. And it’s worth asking whether that playbook still holds in today’s environment, because the reality is that risks are now materially higher than where we started the year. This isn’t noise, it’s a repricing of geopolitical risk. And the duration of the Iranian conflict is, frankly, the single biggest variable hanging over markets.

Right now, the world finds itself in the middle of a potential ceasefire, that has seen the oil price fall sharply and equity markets rebound. Investors should expect volatility to remain heightened.

Not all conflicts matter to markets. This one does because it runs straight through energy.

Oil prices are probably the second most important variable to consider, behind interest rates, when thinking about input variables that impact the world. When you consider that the correlation between oil and inflation and then inflation into interest rates, you could probably argue it’s the most important input to monitor.

The price of oil has increased 50% since the Iran conflict began. The general thesis was that the war would be short lived, which perhaps ignored the history of what is one of the oldest civilisations on the planet. Now we are faced with a reality that this has the potential to materially impact portfolios.

The cost to human life is real and impossible to calculate. The cost of the war itself varies but currently I have read estimates of anywhere between $200B and $400B including weapons, damage, and cost to rebuild, but the economic impact of this disruption is estimated to be between 1% and 3% of global GDP (global GDP is about US$100 trillion) depending on what happens next.

The world is faced with three simple scenarios. Yesterday we saw the first step towards de-escalation, but there are still a few twists and turns to play out.

The first is de-escalation - a brokered ceasefire, which Trump often says is what he wants. Oil pulls back. LNG stabilises. Inflation expectations ease. Central banks regain optionality. Risk assets recover. Iran is asking for a full ceasefire, including sanctions being lifted. This is what the market generally believes is most likely. The consensus was that Trump would announce he has achieved what he wanted, declare victory, and step back. The US public was recently polled, with 90% wanting the conflict to end and 70% opposing ground troops. While the market may be pricing this outcome as likely, oil is not.

The second is escalation, specifically either significant bombing of key infrastructure, what Donald suggests is “bombing Iran into the stone age”, or ground troops. This would cause major disruption to infrastructure in Iran, which would likely retaliate across the UAE or Oman. Global security would change materially, as any response from Iran would be aimed at economic disruption. Iran does not have the capability to match physical damage, so it would target economic damage instead. This is not a headline risk. It would be a supply shock unlike most have seen. For now, that risk appears to be easing.

The third is the messy middle - oscillation. Tensions flare, then cool, week by week. Oil spikes, retracts, then spikes again. Markets churn and confidence erodes. This is effectively what we have seen over the past seven weeks.

Now here is what matters. This conflict has highlighted that the system has very little slack.

Global oil demand is just over 100 million barrels per day. The Middle East supplies roughly a third of that, and more importantly, most of the spare capacity. Remove even 3–5 million barrels per day and you are not rebalancing supply, you are exposing the absence of alternatives.

US shale can respond, but slowly. Call it 1 to 1.5 million barrels per day over 12 to 18 months if price incentives hold. Offshore projects take years. Global reserves are already being used, but if you assume a 10% reduction in supply, reserves would last broadly three months.

LNG is tighter again. Global trade sits around 400 million tonnes per annum. Qatar alone accounts for roughly 20%. If that flow is disrupted, there is no immediate replacement. The US is the swing supplier, but it is already running at capacity. New supply is coming, but on a multi-year timeline.

The reality is energy markets do not adjust smoothly. They gap. A small disruption in volume becomes a large move in price because there is no buffer, and no real short-term solution.

Oil feeds directly into inflation. Higher oil and LNG prices lift transport, electricity, and input costs. That flows into CPI. Central banks cannot ignore this as transitory. Rates stay higher for longer, and could move higher again. Consumers feel it immediately through fuel, food, and utilities. Discretionary spending tightens, employment slows, and business investment weakens. This time, it likely also feeds into housing, as people have held on, expecting a recovery that may not come as quickly as hoped.

So the outcome of any peace agreement will not be theoretical, it will be mechanical.

Over the past week, Trump has said the war will end quickly, then signalled escalation, then called for a ceasefire. Today we have talk of peace. With Trump, there are still likely a few acts to play out.

Any good Trump analyst will tell me that Trump always does both. It’s negotiation 101 - threaten aggressively but don’t pull the trigger - Greenland, Chinese tariffs, North Korea, so on and so forth.  So rather than be fearful that lunacy takes hold, we just need to recognise that we have probably all been guilty of being too casual about the strategic importance of the supply chain of oil.

Now bring that back to New Zealand, where we sit at the end of the supply chain, not the centre of it.

We import essentially all of our refined fuels. Marsden Point was our only refinery and shut in 2022. Since then, we’ve relied on imported petrol, diesel, and jet fuel, largely from Asia and the Middle East. That means we’re exposed not just to crude prices, but to refining margins, shipping capacity, and global competition for finished product.

The obvious question - why not lean on Australia?

Australia cannot bail us out as its refining capacity has shrunk materially. It imports a large share of its own fuel and relies on the same Asian supply chains we do. Even if it had surplus, logistics and contracts don’t flex overnight.

In short, there is no regional safety net; the fact is we’ve traded resilience for efficiency. It worked in a stable world. It looks different in a volatile one.

What do you do?

At a national level, the levers are clear - more storage, more diversified supply, and a serious conversation about strategic capability. That is not necessarily rebuilding a full refinery but acknowledging that pure just-in-time supply carries risk. We can expect sensible government-supported investment into our supply chain across most things, which, to be frank is the government’s job, not to tweet and comment on every single micro thing. Being grumpy right now, I do not care about a politician’s view on the rugby, their plans for Easter, or whether we should subsidise some pet project.  Their job is to focus on the macro investments that keep its citizens employed, healthy and safe.

For an investor it’s more nuanced, while the question is simpler: where does capital go when energy becomes unstable? You have to also balance that with how long will it remain unstable.

I start with the macro by looking at what the market thinks is the base case, which currently is de-escalation, then compare that with what has already moved or what hasn’t.  Then overlay that with the following logic.

What struggles?

Anything energy-intensive with no pricing power is going to struggle - transport, logistics, low-margin manufacturing, discretionary retail. These businesses wear higher input costs and can’t fully pass them on. Margins compress and demand softens at the same time.  They will have a hard time.

What holds up?

Defence is the obvious one. Spending is already committed and rising, driven by policy, not the cycle. That said, defence stocks were already elevated and while many stocks rallied in the first few days, most have fallen with markets.  To me though, standing back, the big four defence stocks trade at 15-20x EV/EBITDA, have 5-10% EBITDA growth and have margins on average at 15%.  This puts them into the category of very stable investments in this environment that are also low-growth, low-margin investments.  Personally, though, I would rather own something more positive than betting the world is going to arm up because it has been wartime for a while now under Trump and Putin.

Balancing the fact the market is down a bit (4%), consensus is currently for de-escalation. I would say the market is under-pricing the risk of a long drawn-out process, or escalation.  It is doing so in the belief that the economic cost is too high.  The question I would put to an investor is, Do you really feel confident enough that you can call it, and even if you get it right and the market bounces 5%, will oil really go back to the old levels or will it stay above US$80 a barrel for some time to come?

This leads me to what I think is the interesting outcome of all this, which is electrification - and this is where nuance matters.

At first glance, higher energy prices sound negative for everything. But for electrification, it’s the opposite, and could be where New Zealand decides to pivot into building resilience into its systems.

The more volatile and expensive fossil fuels become, the stronger the case for alternatives, across the board.  Renewable electricity - wind, solar, hydro - has high upfront costs but low and predictable marginal costs, plus no fuel input and the benefit that we control the supply chain.

What matters is that renewables shift energy from a traded commodity to a domestic asset, and for New Zealand, that’s particularly relevant. We already generate a large share of electricity from renewables, but it doesn’t make us immune and will never be the full solution, but lowering our reliance and increasing our resilience is important and is likely to get more attention.

Electricity demand rises as transport and industry electrify. They will electrify as government-supported investment solves infrastructure constraints, such as generation, storage, and grid capacity. In the short term, gas still plays a balancing role, which means LNG prices still matter, so we should actively be encouraging gas exploration.

Consumer behaviours will change. Anecdotally I hear that BYD and Tesla sales staff have been run off their feet as car sales companies prey on the fear of fuelling up. My bet is the CFO at bus operator Ritchies Transport, owned by private equity company KKR, is feeling pretty happy about life, and probably a few investment bankers might be pushing it to an IPO.  Even second-hand Audi E-Trons probably look like good value now.

To me, the takeaway is straightforward - electrification wins. It is not instant, and it’s not frictionless, but my guess is that long-term investors should be open to looking at something like Contact Energy. Contact trades on 12x EBITDA, will grow EBITDA gradually depending on the weather, and produces circa 30% EBITDA margins. This allows it to pay a healthy dividend, so in an environment that feels pretty tough, where our return expectations should be tempered and income should be prized, we have a few good sensible options.

We’re moving from a world where energy was abundant and predictable to one where it’s strategic and volatile. In this environment markets will swing between overreacting and underestimating - because that’s what markets do.

Our investment strategies need to embrace that concept at the moment because whether the Iran war escalates or de-escalates is actually out of the average investor’s control, and escalation is ugly.  Regardless of what happens, I don’t see a world where oil prices aren’t more connected to that strategic risk for a while, especially as people build strategic reserves again.

For an investor, control what you can. Do you need to be fully invested? Hedge what you can’t, reduce your risks.  And be very clear about which parts of your portfolio - and your economy - are exposed to forces you no longer control.

The reality for many investors is simple, and goes back to one my golden rules: If you’re not sure, don’t place a bet.  The easiest way to grow your wealth is actually not to lose it on bad bets. 

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Travel

13 April – Taupo – Johnny Lee

14 April – Hamilton – Johnny Lee

15 April – Tauranga – Johnny Lee

16 April – Lower Hutt – David Colman

17 April – Napier – Johnny Lee

22 April – Auckland (Ellerslie) – Edward Lee

23 April – Auckland (Albany) – Edward Lee

Chris Lee & Partners Limited

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