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Middle East unrest and its influence on markets
In summary
Concerns over a wider regional conflict in the Middle East have been stirring markets, with tensions boiling over in April. Henrietta Walker, Head of Investment Specialists, discusses the ramifications of the recent market volatility and how that informs our asset allocation views.
Subsiding tensions for now
Unsurprisingly, tensions spiked higher following the flashpoint with Israel’s expanded ground operation into Rafah. However, with limited international reaction, the potential for a broader regional escalation subsided. Unfortunately, however, we know that circumstances can change rapidly.
Geopolitical risk is complicated
We are entering a heightened phase of uncertainty and likely volatility for markets. Geopolitical risk can impact the global economy and supply chains in a number of ways. These are some scenarios we could see:
Sustained Oil price rises
As we have seen from the Russia-Ukraine conflict, the most immediate impact of a broader and escalatory conflict is likely to be oil prices moving higher (and crucially staying high), which could quickly transmit globally across financial markets.
Sticky inflation
If oil prices were to rise longer term, it would also come when there is already concern about sticky inflationary pressures. In the US, for example, this could diminish hopes for central bank rate cuts.
Disappearing soft landing
However, geopolitical risk is complicated and multi-faceted. If the risk to economic growth proves too great, then fears of a slowdown could prompt central banks to pre-emptively loosen policy, which can have both positive and negative impacts.
Our asset allocation views are nuanced
Despite our overall constructive outlook, we are mindful that tail risks continue to exist. So, we are keeping our exposure balanced towards more than one economic scenario:
Macro
We believe we are continuing down a track for a ‘goldilocks’ global economy. In this scenario, inflation continues downward without growth stalling. Despite the hyper-focus from markets on short-term movements - which we should be aware of the medium- to the longer-term direction of travel for inflation has been mostly downward.
Equities
We continue to advocate a global balance between equity value and growth investment styles. Specifically, within growth sectors, we have a positive outlook on the US as corporate fundamentals remain strong. We believe there is scope for small- and mid-sized companies in the US to outperform their larger counterparts as the year progresses and the leadership by sector has broadened.
Fixed income
Given the near-term risks of inflation remaining sticky, we have slightly increased exposure to government-issued inflation-linked bonds. We believe this will reduce portfolio sensitivity to inflation surprises, improve risk-adjusted returns (by providing a yield similar to traditional bonds but with lower volatility), and provide more targeted exposure to higher inflation expectations.
Our key takeaways
By remaining focused on your long-term investment objectives, you will have greater potential to weather short-term market volatility and capitalise on the growth potential of your investments. It is important to remember that staying invested in a well-diversified portfolio gives the greatest potential for your investment portfolio to grow.
It is understandable that investors become apprehensive during shorter-term market volatility and will instinctively want to exit the markets and move to cash. This can be counterintuitive as only by disinvesting are you realising the loss or lower value of your investments. By remaining invested, you give your investments time to recover when the volatility subsides without incurring any ‘real’ losses.
Important information
Investors should be aware that the price of investments and the income from them can go down as well as up and that neither is guaranteed. Past performance is not a reliable indicator of future results. Investors may not get back the amount invested. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. Investors should be aware of the additional risks associated with investing in smaller companies, emerging or developing markets. The value of your investment may be impacted if the issuers of underlying fixed income holdings default, or market perceptions of their credit risk change.
The information in this document does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. This document is for the information of the recipient only and should not be reproduced, copied or made available to others.
Brooks Macdonald is a trading name of Brooks Macdonald Group plc used by various companies in the Brooks Macdonald group of companies. Brooks Macdonald Group plc is registered in England No: 04402058. Registered office: 21 Lombard Street, London, EC3V 9AH.
Brooks Macdonald International is a trading name of Brooks Macdonald Asset Management (International) Limited. Brooks Macdonald Asset Management (International) Limited is licensed and regulated by the Jersey Financial Services Commission. Its Guernsey branch is licensed and regulated by the Guernsey Financial Services Commission and its Isle of Man branch is licensed and regulated by the Isle of Man Financial Services Authority. In respect of services provided in the Republic of South Africa, Brooks Macdonald Asset Management (International) Limited is an authorised Financial Services Provider regulated by the South African Financial Sector Conduct Authority. Registered in Jersey No: 143275. Registered office: 5 Anley Street, St Helier, Jersey, JE2 3QE.
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