Written by:
Alex Chappell
Investment Manager at Amber River DB Wood
As of Thursday this week, our portfolio range remains in positive territory, up by 1.02% (Very Low Risk) and 2.11% (High Risk) year to date.
Given the ensuing conflicts in the middle east, this update will largely fast-forward February to instead focus on the issue at hand. Suffice to say though that coming into this week it had been another strong month for the portfolios, with calendar year to date progress of between 0.86% (Very Low Risk) and 2.93% (High Risk), building on January in what to that point had been a positive start to the year.
Unfortunately, the tensions in the Middle East have morphed into a broad based destabilisation in the region effecting oil prices and other energy assets. The main transmission is that the region provides access to one of the world most important shipping routes. Whilst it feels like we are a long way away from what is happening, the UK and Europe in particular, have already seen a sharp rise in live energy prices. UK natural gas as an example, has risen around 75% since last Friday, the type of move otherwise only seen in 2022 when Russia invaded in Ukraine.
Similar to then, nearly all investment markets have seen a reduction in value. Higher energy prices means higher inflation, which means interest rates can’t come down as much, and economic growth is likely to slow. That narrative is generally poor for equity and bond markets, so we have seen equity markets fall by c5% and our bond portfolio by c1%. Our portfolios comparatively have held up well – High Risk is off 2.4% at the time of writing, and Very Low Risk just 0.6%. As of Thursday this week, our portfolio range remains in positive territory, up by 1.02% (Very Low Risk) and 2.11% (High Risk) year to date. Whilst it is very challenging to predict how things will play out from here, on a 2-4 week view, we would make the following points:
The broad-based response by Iran is likely to bring many countries to the table to try to neutralise things. Trump has mid-term elections in November, and the polling for this conflict is not particular high given the impact on US gas prices, so he will likely need a deal. Similarly, China relies heavily on exports from the middle-east, so they will not be happy if prices stay high for too long. With respect to Iran, closing the Straitz of Hormuz would wipe out 90% of their oil and gas exports, a seemingly suicidal move for an economy which is already in all kinds of trouble. Overall, it is in everyone’s interest for things to de-escalate and come to an agreement. That’s the logic at least.
We came into February positively positioned, though those that follow our blogs will know that we have been highlighting the need to stay diversified for some time.
Of course that synopsis could be wrong, we are dealing with some ego driven politicians, so it is worth considering the impacts over a longer timeline if things don’t play out. Oil is around 15% higher this week, which will of course translate to higher prices at the pump. That said, there is a large element of tax in every litre of fuel, which won’t be changing, so the real world translation is likely to be a 5% increase in petrol prices. Similarly, UK gas bills are priced quarterly and we already know the price cap is moving down in April, so any changes will not fully feed through until July’s review. Hopefully by this point there will either be a resolution or a re-structuring to supplies. One of our trusted economists believes that combined those factors would likely add 0.3-0.4% to CPI this year if current prices are held constant for 12 months. Not a big impact then, given CPI was likely to be in the 2%-3% range if this didn’t occur.
Put together our view is that beyond the obvious human tragedy, and the wider consequences of the US taking action without consensus from its NATO allies, the risks of this conflict are less than markets are currently illustrating.
Now again, we could well be wrong. That is our best guess based on current logic, though as we all know, geopolitics often does not follow conventional wisdom.
At the same time it is worth also highlighting that markets are now producing some opportunities. Bonds are yielding close to 0.5% more today than they were at the start of the week. That is an extra return that we can lock in for the future by investing today. Similarly, there are opportunities in equities, and the UK economic example before goes to highlight that there may be much less impact in certain sectors than is feared.
We came into February positively positioned, though those that follow our blogs will know that we have been highlighting the need to stay diversified for some time. Right now that diversification is paying off, and as we always try to do, we have already made some active changes to our portfolios to take advantage of some of the opportunities that have been presented, as well as to make sure we have some robust defensive positions in place. Historically we have found that the actions taken in times of difficulty can make a significant difference.
Finally, just to reiterate that should you wish to ask any direct questions, please remember to contact your advice team directly or alternatively you can reach us via email: questions@amberriverdbwood.com
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