A dreaded re-escalation scenario

With the United States and Israel now at odds over the Middle East conflict and a still nebulous 60-day negotiation to flesh out a durable ceasefire deal between the US and Iran, First Metro Securities Brokerage Corp. believes that a breakdown in talks would reinforce the very macro risks that a ceasefire seeks to unwind.

“Renewed strikes, fragile shipping flows and thin trust in negotiations,” the Metrobank-led brokerage firm wrote in its Market Focus report, “would quickly re?embed volatility into energy markets and re?ignite inflation premia.”

The current ceasefire, FirstMetroSec, pointed out, “is constructive, but remains fragile: the US and Israel pursue different agendas and outcomes; the Strait of Hormuz remains under Iran’s control with no guarantee of freedom of navigation; and negotiation terms remain vague, with tight timelines and limited enforcement. These fault lines mean that any violation could unravel confidence in the process, leaving markets to price in higher risk premia and households and corporates to brace for renewed cost pressures.”

Under such a scenario, FirstMetroSec outlined, “macro and market drivers flip back into risk mode: oil spikes, economic scarring deepens, policy sequencing becomes more complex and fiscal buffers erode. Oil spikes back above $100 to $150/bbl. Ceasefire violations and prolonged reduction in Hormuz traffic would drive oil prices sharply higher. Surge in insurance premiums and constrained shipping activity would keep risk premia sticky across energy and freight markets. More critically, violations and re-escalation undermine confidence in future ceasefire talks. Refiners, shippers and end-users would then embed higher contingency costs into contracts, locking in persistent inflationary pressures throughout supply chains and making the shock harder to unwind.”

The brokerage firm warned that the “Philippine economy risks deeper scarring. The country is one of the highly exposed economies to energy prices in Asia. This is due to two structural factors: A heavy reliance on imports of oil, gas and refined products: Over 96 percent  of crude oil import volumes are sourced from the Middle East. This dependence amplifies vulnerability to global energy shocks: higher oil and gas prices immediately raise the import bill, squeeze margins in energy-intensive sectors and feed directly into transport and utility inflation. Fertilizer imports transmit the shock into agriculture and food production, while Asia-wide energy deficits pass through trade flows and into imported inflation that is amplified by peso depreciation.”

It elaborated that “Energy shocks further strain foreign exchange and drive-up inflation. Data since 2015 show a 60 percent correlation of the peso to oil prices,” adding that “the Philippines exhibits one of the highest sensitivities to upside CPI risk, given the strong pass- through from fuel costs into transport, utilities and food components.”

Thus, FirstMetroSec emphasized,  “a long, drawn-out oil shock would lead to deeper economic scarring and slow recovery,” and that “persistent high input costs erode real incomes, compress margins and delay investment plans – prolonging the time needed for growth to normalize. At $100/bbl price of Brent, our DBS economists estimate a direct impact of at least 0.4ppt drag on GDP growth and +1.1ppt change in CPI, sans secondary round-effects through other pass-through channels.”

Furthermore, FirstMetroSec’s Market Focus report said, “Monetary policy decisions amid the ongoing conflict are less about direction and more about timing, shaped by the order in which inflation and growth adjust to a supply-side shock. The challenge is that the oil shock frontloads inflation risk and backloads growth risk, requiring the BSP to hold (or hike) first, then cut later.”

It noted that “Rising inflation expectations compel an initial pause on tightening: further hikes would do little to curb first-round price effects yet worsen the growth drag. Should inflation breach the comfort range, tightening would still be needed to anchor expectations, even as demand remains weak. Only after elevated prices and restrictive rates erode real incomes, soften consumption and trigger demand destruction does the window for easing open. Duration risk lengthens this cycle, keeping the BSP cautious longer and complicating the sequencing challenge.”

A re-escalation, the report continued, would also result in further fiscal strain. “Subsidy blowouts, excise-tax suspensions and emergency interventions become unavoidable, constraining already thin fiscal space. Fuel subsidies carry heavy costs, while fertilizer support may be required to limit food price pass-through. Strategic reserves in fuel and food turn essential to cushion households and stabilize supply chains. Pressure to expand social transfers would also intensify. These measures constrain fiscal balances, leaving less room for the government to provide counter-cyclical support should growth slow further. Policymakers can mitigate the impact through targeted subsidies, accelerated renewable energy programs and private sector coordination. Yet duration risk magnifies these challenges: the longer the shock persists, the more fiscal space is constrained, forcing trade-offs between immediate relief and long-term sustainability.”

Under a breakdown in ceasefire talks or renewed escalation, FirstMetroSec said, “the investment environment shifts back toward risk aversion, stemming from elevated energy volatility as well as pressure on inflation and currency. In this backdrop, we recommend reverting to a defensive, resilience-first positioning, favoring names with stable cash flows, pricing power and low sensitivity to fuel and freight costs. Prioritize balance sheet strength, margin stability and exposure to sectors that can withstand prolonged uncertainty.”

The Ty-led brokerage firm favors “defensive, consumer-facing names that have historically held up well during periods of geopolitical stress and elevated inflation. Mall operators remain our preferred retail exposure given resilient foot traffic and the ability to pass through modest rental adjustments. Grocers also offer stable revenue streams as households tighten budgets, with demand from middle- to high-income consumers proving more resilient to fuel-driven inflation. Within utilities, we prefer electricity and fixed-line broadband, as demand is structurally inelastic and less discretionary.”

However, it has  a more cautious stance toward sectors that are most exposed to fuel volatility, input cost pressures and rate-sensitive valuation risk.