Global natural gas prices have surged, but still sit nowhere near the levels seen in 2022, and equity markets have remained volatile.
The twists and turns of the conflict in Iran continue to unravel, though it did feel (up until yesterday) that we had reached a bit of a standoff. However, the bombing by Iran (overnight) of one of the largest natural gas plants in the world (in Qatar) has just raised the stakes, as well as the price of natural gas.
Prior to this, Trump had, in his words, ‘obliterated Iran’s capabilities’, though the Strait of Hormuz still remains effectively closed. Global leaders have declined his plea to help him police the Strait to get oil flowing again, and Iran remain defiant despite massive challenges to their economy and leadership.
We sat at a conference about a month ago and listened to an ex Deputy Chief of NATO explain that in all but name, NATO as we know it, is over. That view has only been reinforced by this war, with allies taking opposing positions rather than the unified stance we have seen for over 50 years. Quite worrying from the perspective of global stability, and supportive of the need for countries to step up their military spend. So, against the backdrop of what is an increasingly ugly world, it is challenging to find the right investment path.
The challenges seemed less so earlier this week. Market activity had started to reflect the standoff, and oil had stabilised, trading around $100 per barrel. Global natural gas prices have surged, but still sit nowhere near the levels seen in 2022, and equity markets have remained volatile. Bond markets, which quickly moved to price out all expected interest rate cuts for 2026 are now pricing in an increase in interest rates this year. Everyone is waiting to see what the next move is… escalation or de-escalation. Stick or twist.
We have heard, considered and discussed a lot of potential scenarios from here. The reality of course is that no one really knows, and any newsflow or opinion you do see or hear, is likely missing key information and/or includes bias. We could just as easily paint a picture where Trump takes control of Kharg Island in order to maximise his leverage prior to doing a deal, to one where he gets drawn into an elongated and frustrating conflict.
The Federal Reserve took the right line (last night when they met), not to cut interest rates, with Chairman Powell delivering a very balanced and sensible speech.
That said, in our view the most important point in the whole debate is that the incentives for Trump are not the latter. He campaigned on being the peace President, ending the forever wars and focusing on things at home, so it is no surprise that he is polling extremely low amongst his supporters on this issue. The midterm elections are in early November, so its not next week, but the longer this goes on the more he risks a real change in economic momentum prior to that. The Federal Reserve took the right line (last night when they met), not to cut interest rates, with Chairman Powell delivering a very balanced and sensible speech. He did acknowledge the forward inflationary pressures if the war is prolonged, and we believe everything points to a deal being brokered, it’s just how long the powers at be wish to play hard ball.
From a portfolio perspective, we are reasonably pleased with how everything has held up. There are always areas of improvement, but for all portfolios to still be positive or flat in 2026 despite the recent correction, is a strong outcome. In addition, recent activity has been focused on taking advantage of some of the opportunities that have been presented. A key example is in bonds, where yields have moved sharply higher. We are now getting more than 4% for 6 month UK bonds, which is higher than cash rates, and more than 4.5% for 5 year government bonds. If we were to see a deal to bring the war to an end, we think these rates offer great income and good potential for additional capital upside from here.
So the stick or the twist and the timeline for this war are the key factors. If there is a de-escalation, then oil will fall sharply as will inflation expectations. If this drags on for a long time, then there is greater long term inflation risk, which would also heighten economic risks. Naturally we expect Central Banks to be very cautious though supportive. Either way bonds should help portfolio performance from here, so we have reduced our cash positions and added accordingly. Similarly in the higher risk portfolios we have rotated out of equity positions that have been very defensive into those which have sold off indiscriminately but have strong underlying fundamentals. Many of the UK banks now trade on less than 10x this years estimated earnings, despite being natural benefactors from interest rates staying higher for longer.
It is always true that periods of volatility provide opportunity as long as we stay vigilant. What we are looking for are areas that are likely to perform well in all scenarios, bonds being the best example of this, therefore giving us a good degree of comfort, in what is a very uncomfortable world.
We will be back to you in two weeks’ time with our performance update on Q1, At the moment our portfolio range still remains positive for the quarter so far, despite the March volatility.
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