A top-2% fund manager shares where he'll be looking for opportunities as Middle East turmoil threatens tech

• Rising oil prices due to the Iran war could impact tech stocks and the AI trade.
• That's according to Tom Hancock, a fund manager at GMO.
• He suggested looking to healthcare stocks if Middle East turmoil continues.

Rising oil prices — and their potential impact on inflation — are front and center in the market conversation right now.

Yet, if the conflict between Iran and the US and Israel continues and the Strait of Hormuz stays closed, attention could start to shift to the tech sector and the AI trade, according to Tom Hancock, the head of the Focused Equity team at asset management firm GMO.

While that may seem like an odd line to draw at first, Hancock is thinking of the potential knock-on effects on capital flows that could stem from an extended closure of the Strait of Hormuz.

If Middle Eastern oil producers can't easily sell their oil in the global market, they have less money coming in to invest in US assets. This could be particularly harmful to tech companies, he said, which are borrowing heavily to fund AI data centers and hardware.

"You buy their oil, money goes in, that money comes out, and it goes into things like data centers and private equity and venture capital," Hancock told Business Insider. adding that a risk-off shift could lead to less investment from the region, which makes him concerned about the continued foreign investment into the tech space.

Hancock said the effects could hit tech manufacturers by raising energy costs, too.

"I think things would have to be pretty severe before TSMC was on course not to run their fabs, but it could at least hit their profit margins."

The danger of such a scenario playing out is not necessarily imminent, Hancock said, as the blockade in the Strait of Hormuz would have to last months to result in heavily curtailed investment flows from the region.

But a prolonged blockade now appears to be at least one step closer to playing out. On Thursday, oil prices surged back to $100 as Iran's new Supreme Leader, Mojtaba Khamenei, said that the country would continue to keep the critical shipping lane shuttered.

Where to hide if Middle East turmoil continues

Hancock is no stranger to investing during volatile times. In fact, his GMO Quality Fund, which Morningstar data shows has beaten 98% of similar funds over the last 15 years, is built to weather market storms by focusing on stocks with strong business models and high margins.

So, how would he shift his strategy if turmoil in the Middle East continues to shake financial markets? He said he'd ramp up his allocation to the healthcare sector.

"If we were getting more risk-averse, that's probably where we would be deploying more capital," he said.

Healthcare is traditionally considered a defensive sector, meaning it tends to be insulated from fluctuations in the business cycle. But Hancock said it's also attractive on a secular, fundamental basis, and called it one of the best opportunities in the market right now.

He especially likes UnitedHealth Group.

"United Health Group can be very volatile about whatever news is coming out of CMS and US policy," Hancock said, using the acronym for the Centers for Medicare and Medicaid Services. "So depending on what the news flow is, that's actually when those kind of companies tend to do best, when no one's talking about them."

For investors seeking broader exposure to the healthcare sector, examples of relevant exchange-traded funds include the State Street Health Care Select Sector SPDR ETF (XLV) and the iShares US Healthcare ETF (IYH).