Good morning, investors. Phil here, writing to you from Miami.

I’m at the Future Proof conference in South Beach this week meeting the smartest people working at the intersection of investing, wealth management and FinTech.

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In today’s edition, we’re turning to a contrarian investment idea for the Iran conflict.

A bullish Saudi Arabia play

Fears of a worsening, prolonged oil shock are shaping global markets right now.

The escalating conflict with Iran makes the iShares MSCI Saudi Arabia ETF (KSA) look increasingly mispriced.

The fund — which broadly tracks Saudi Arabia’s stock market and is heavily weighted to oil and financials — hovers near five-year lows, even as uncertainty in the Middle East has pushed Brent crude prices above $100 a barrel for the first time since March 2022.

That suggests the gap between Saudi Arabian equities and the Kingdom’s economic reality is widening.

And as intuitive as it may sound to avoid the ETF for its geographic proximity to Iran, the Israeli stock market provides a counterpoint to that approach, given that it’s been one of the world’s top-performers this year.

Indeed, the backdrop of fast-rising oil prices points to a bullish outlook for KSA.

On Sunday, global crude prices notched their largest one-day gain in four decades.

As the world braces for a supply squeeze due to disruptions in the Strait of Hormuz, Saudi Arabia could be the only energy producer with enough spare capacity to step in and help stabilize global oil markets.

For the Saudis, higher crude prices strengthen the country’s finances and reinforce domestic investment.

The ETF’s depressed valuation at this moment, however, suggests investors remain fixated on geopolitical risks rather than oil economics.

Analysts estimate that Saudi Arabia maintains as much as 2 million barrels per day of spare oil capacity, which could soon come into play as other countries’ inventories tighten.

It’s worth noting, too, that Saudi Arabia’s economy is less dependent on oil than in previous cycles.

With the Kingdom’s “Vision 2030” reforms, non-oil activities now account for roughly half of real GDP, with infrastructure spending ramping up.

Plus, major weightings in the ETF like Saudi Aramco and Al Rajhi Bank have seen massive cash-flow acceleration and generous dividends.

With the Iran war catalyzing a potential global oil supply shock, the producer with the keys to the tap could very well command the most bullish investment thesis — especially as its benchmark ETF trades at its cheapest valuation in half a decade.

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🌍The UAE and Kuwait started reducing oil production. The near-closure of the Strait of Hormuz is pushing nations in the region to figure out how to balance output with the sudden need for more storage. (Bloomberg)

⚡The US is relatively insulated from energy shocks. While prices for heating and power-generation fuel have soared globally, they haven’t yet in America due to its ample natural gas inventories. (WSJ)

📉February jobs came in weaker than expected. The US economy lost 92,000 jobs in the month, missing estimates for a gain of 50,000. The unemployment rate also ticked up to 4.4%. (CNBC)

🗓 March 9, 2009: The S&P 500 closed at 676.53, the lowest level of the Financial Crisis bear market, 57% lower from its October 2007 peak.

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