The Middle East, the US and the market

The Middle East is still the focus of global markets as the conflict between Israel and Iran continues. The key piece of news is that, over the weekend, the US intervened as well, supporting Israel. Against this volatile geopolitical backdrop, equity markets continued to decline while oil prices rose in anticipation of disruptions in the oil market.

Going forward, we expect uncertainty and volatility to remain high and have built our flagship portfolios accordingly. We’re globally diversified and hold low-volatility equities and gold (a position we increased very recently) to protect against geopolitical risks, as well as policy uncertainty in the US. We also hold positions in broad commodities and inflation-linked bonds, both of which could benefit from supply-side disruptions caused by the Iran-Israel conflict.

Obviously, the ramifications of these events remain unclear. Market volatility tends to rise and fall with the news, so we seek to diversify our exposures across asset classes and geographically, anticipate developments and adjust portfolios in a composed manner, avoiding overreactions, to stay active tactically but also invested for the longer term to compound returns.

Where permitted by client knowledge and experience, andinvestment guidelines and regulations, such as in our flagship funds, we also own an 'insurance' instrument that appreciates when US equities fall, potentially helping cushion the impact of a hypothetical drawdown.

The Bank of Japan, Federal Reserve (Fed) and Bank of England all held interest rates steady last week. In Japan, there are concerns that the US-imposed tariffs will impact growth, and, therefore, the central bank is in “wait and see mode” before deciding to raise rates. Similarly, Fed Chairman Powell struck a cautious tone despite the slight fall in inflation. The end of the pause in reciprocal tariffs is nearing, and trade-related shocks could quickly reverse recent disinflationary trends. Therefore, the Fed will want more evidence that inflation is under control before any rate cuts.  

As mentioned above, the Bank of England followed suit and held bank rates steady at 4.25%, as inflation continues to decline but remains above target. Even though recent data show that the labour market is cooling and inflation is easing, policymakers seem reluctant to cut rates, given the elevated level of uncertainty brought on by the tensions in the Middle East.

Our base case remains one where central banks are near the end of their rate-cutting cycles. However, there's significant uncertainty in the market and some signs of economic slowdown. Therefore, we believe that risks are tilted towards more rate cuts, though limited given the inflation risks. We think the threshold to lower rates is higher in the US, where inflation is higher, compared to the Eurozone, with the UK in between.

Obviously, investors will focus on any development out of the Middle East and any impact on financial and commodity markets. On Friday, we'll also have a range of inflation releases out of France and Spain (ahead of the European one next week) and the US. While these measures are somewhat backwards-looking, the market is likely to scrutinise any early effect of the tariffs and the rise in oil prices.