Navigating uncertainty, staying resilient

Investors face a complex landscape. The most pressing issue is a potentially prolonged disruption to global energy supplies. But questions about the sustainability of AI capital spending and the risk of software industry disruption have not gone away. Meanwhile, volatility in bond markets reflects inflation and debt concerns.

At the same time, a military or political solution that restores oil and gas flows from the Middle East would likely see markets rebound. Fiscal stimulus should keep global economies resilient, provided we avoid a prolonged period of high energy prices. And with inflation now lower than it was at the onset of the 2022 energy price spike, we do not believe central banks will be forced into raising interest rates.

Our recommendation for long-term investors is clear: Stay invested. History shows that attempts to “market time” geopolitical events often result in failure. Our base case is that equity markets will end the year higher, and that bond yields will end the year lower. Periods of volatility can also represent attractive times for investors looking to deploy cash to “phase in.”

Nonetheless, the path by which energy flows will be restored is still unclear; Iran is still both able and willing to disrupt shipping, the potential effectiveness of a military convoy is unclear, and further strikes on energy infrastructure would pose longer-term supply risks.  

In January, we said that investors should rebalance, diversify, and hedge. In a CIO Alert published on 9 March, we recommended building a plan for navigating the crisis the longer it lasts, using oil prices to help guide progressive portfolio derisking, should it prove necessary. So while we hold an Attractive stance on equities overall, we also emphasize regional and sectoral diversification, managing concentration risks, building allocations to quality bonds, broad commodities, gold, and alternatives, as well as making specific reductions to risk and adding hedges where appropriate. 

Following our downgrades to the US information technology and US communication services sectors in February, we have reduced European financials to Neutral. We have also positioned for short-term US dollar upside, especially relative to cyclical currencies, which could be an effective hedge against the crisis lasting for longer. 

While the future is uncertain and risks are elevated, by staying invested, diversifying, and hedging, we believe portfolios can navigate current challenges and capture future opportunities.