Uncertainty in markets, certainty in what we’re doing

Here’s our latest market update on the ongoing US–Iran conflict, which you can also download as a PDF.

In a nutshell:

➡️ The continuing uncertainty caused by the US-Iran war continues to highlight the need for Alternatives in a portfolio. 

➡️ Our core asset allocation is diversified and robust, tested to perform well through these market conditions. 

➡️ We continue to hold conviction in our approach and have made no further changes. 

Since our last update on the US-Iran war, we’ve had peace talks and ceasefires followed by disagreements and blockades.

Markets remain as uncertain as we all are about what Trump might post next on social media. What is certain is that a well-diversified portfolio and a long-term investment approach is the best way forward. That’s why we’ve not made any further changes.

What’s happening in markets?

The IMF predicts that the UK will be the hardest hit of the world’s most advanced economies. It cut its estimate for growth from 1.3% to 0.8%. It also predicts that UK inflation will be the highest of the G7 nations at 3.2%.

But it’s not all doom and gloom, as next year it expects the UK to be the fastest growing European economy back at 1.3% growth.

While this shows a potential short-term blip, it demonstrates the need to diversify across sectors and geographies, as countries and areas will fall in and out of favour over time. Missing out on the UK now could mean missing out on future growth.

Oil

The oil price is still all over the place, peaking at over $112 around Easter before sinking back to around $91 a week later. Still uncomfortably high. Sentiment changes with the news each day, depending on how many ships can pass through the Strait of Hormuz and what’s been agreed or stated.

The oil price is key as it impacts inflation that’s driving much of the bond and equity markets around the world.

The question is how long high prices will remain as they affect nearly everything else. Noone knows the answer.

Bonds

Before the war, everyone was expecting cuts from the current Bank of England (BoE) rate of 3.75%. Now, with the need to control inflation above the BoE’s 2% target, interest rate rises seem more possible, if not likely.

However, 10- and two-year gilt yields have fallen slightly from their recent 5% and 4.5% highs and still have priced in interest rate rises at 4.77% and 4.2% respectively.

In our solutions we previously changed the Government Bond portion of our solutions, moving part into Short-Dated Bonds with lower interest rate sensitivity. The reasoning is that portfolios are better insulated from the risk of yields rising higher, but if things get better quickly, they’ll benefit from changes in interest rate expectations. We’ve seen the benefits from this approach already.

Equities

Stock Markets appear to be recovering after a not so inconsiderable drop since the war started. The FTSE All Share, which contains a lot of major international oil companies, is recovering. The FTSE USA is, as of writing, higher than it was just before the war started.

While there are signs of a recovery, we think the risk of an extended conflict and the impact of reduced energy supply are still very much there. We don’t think we’re out of choppy waters just yet for equities.

Alternatives

We see the importance in Alternatives as an asset class. Especially in uncertain times.

This part of our portfolios is designed to perform differently to bonds and equities at times of stress. While bond and equities historically are meant to move in opposite directions, the first part of this year has shown this isn’t the case.

Alternatives can offer more protection from inflation in events like this. Before the war, we took this asset class overweight because we saw higher global inflation risks. It seems like Alternatives have performed as intended.

It’s risen in value to help cushion portfolios and offer more downside protection.

We’ve not made any recent changes to portfolios. But we’ll continue to watch what’s going on and will make changes if it’s necessary.

Our core asset allocation is diversified and robust by design. It’s built and tested to perform well through most market environments. Any changes will be with a view to enhance outcomes for clients, rather than knee jerk reactions.

As ever, choosing the right level of risk and staying invested over the long-term is key.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.