Written by:
Alex Chappell
Investment Manager at Amber River DB Wood
Markets have recovered well, especially in equity land. In fact just yesterday, the US market made a new all-time high, surpassing the level pre-war.
Most of the time, market moves are the outcome of a complex set of variables. Employment trends, inflation, and earnings releases are just some of the many factors at play. Sometimes though, an event is so significant, it overshadows everything else. At this time, it is of course, the war in Iran – currently for markets nothing else really matters, simply because there are implications for economies far and wide.
Since our last update, we have had some positive progress. There is now a ceasefire in place, originally for 2 weeks finishing next Wednesday (22nd), and despite the US moving to blockade Iranian ports, so far that is holding. At the time of writing, that ceasefire seems likely to be extended to allow for further talks on a long-term peace deal. For now, the worst-case scenario of rolling escalation to include energy infrastructure across the middle-east, looks less likely.
Markets have recovered well, especially in equity land. In fact just yesterday, the US market made a new all-time high, surpassing the level pre-war. European and other markets haven’t recovered to quite the same extent, but they are now just a few percentage points off their pre-war levels. That said, the US market had been a laggard pre the war, and as such, now in the positive by just over 1% year to date.
Equity investors are often ‘optimists’ and bond investors ‘realists’, so it is no surprise that bond markets have stabilised, but remain much more cautious. They have so far only regained about 1/3rd of what they lost in March. If I could caption it in a conversation… equity markets are saying “great, this is pretty much over, let’s move on”, then bond markets reply “are you sure? There is no deal yet and in our view the future looks less stable and certain.”
From a portfolio perspective, it probably won’t surprise you that we have been very active over the last month.
The last point is a key one. Live oil prices are currently hovering between $90 and £95 per barrel, though the price people are paying for physical delivery is significantly higher than that. As time goes on without a peace deal, the live price will gradually get pulled to the price of physical delivery, which would then further unsettle other markets. In this respect whilst an extension to a peace deal is better than an alternative escalation, the solution we need is to get oil flowing again. Dragging this out could well become more damaging for the global economy than escalating for a quicker solution.
From a portfolio perspective, it probably won’t surprise you that we have been very active over the last month. We came into the conflict nicely diversified, and as markets corrected and some of the areas we favour sold off, we rotated the portfolio to add to them. These areas have since come back strongly, and we are very pleased with the portfolios’ bouncebackability (coined I think by Ian Dowie, for the avid football followers) in the last few weeks, with them all now nicely positive again year to date. Then over the last few days we have taken a bit of profit on some of those positions, adding to cash and once again increasing diversification.
For now, we are actively watching things develop, and whilst we certainly feel there is progress to be positive about, until a deal is signed and oil is flowing freely again, it is important to also be cognisant of the risks.
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