Equities rise on hopes of imminent end to Middle East conflict
CIO Daily Updates
From the studio
From the studio
Thought of the day
Thought of the day
Equity and bond markets rallied while oil prices fell in Tuesday’s US trading session on optimism that the conflict in the Middle East may draw to a close sooner than feared.
Iranian President Masoud Pezeshkian told the EU Council president that Iran has “the necessary will to end this war” if certain requirements are met, “especially the essential guarantees to prevent the recurrence of aggression.” Meanwhile, US President Donald Trump said the US could end the war in “two or three weeks” regardless of whether a deal is struck, signaling a desire for an off-ramp to the conflict. The remarks came after Brent crude oil prices spiked to as high as USD 119/bbl on Tuesday, near their crisis high. The president is expected to address the nation via a live broadcast at 9 PM on Wednesday.
The S&P 500 closed up 2.9%, and futures point to a further 0.3% gain at the time of writing on Wednesday. The Euro Stoxx 50 index is following the US market higher, with an advance of 1.7% at the time of writing. South Korea's Kospi index gained 8.4% on Wednesday and the Nikkei 225 rose 5.2%. Bonds also rallied on Tuesday, reflecting optimism that a shorter conflict may reduce the pressure on central banks to raise interest rates; the five-year US Treasury yield fell 4bps to 3.93%. At the time of writing, the five-year yield is 3.90%. Brent crude oil prices are trading near USD 101/bbl.
US stocks were further buoyed by NVIDIA’s 6.6% gain after concluding a deal to invest USD 2 billion in Marvell Technologies as part of an AI infrastructure partnership.
What do we think?
The sharp rally in stocks over the past 24 hours demonstrates how a resolution to the conflict, or hopes thereof, may quickly drive markets higher, and the imperative for long-term investors to stay invested and positioned for market upside. We continue to believe global stock markets will end the year higher than they are today.
At the same time, while signs of a willingness to negotiate are positive, hurdles remain before an actual end to the conflict. A resumption of energy flows may take longer still, and we note that a sudden end to the conflict, while leaving the status of the Strait of Hormuz unclear, may also leave energy prices higher for longer.
What to do?
Stay invested. We believe long-term investors should stay invested and positioned for medium-term upside. They should also continue to take opportunities to diversify and hedge portfolios and manage exposures to markets most at risk from elevated energy prices.
Manage exposure to at-risk equity markets. In our CIO Alert "Use market bounce to diversify and hedge," published on 23 March, we downgraded European, Eurozone, and Indian equities to Neutral and upgraded Swiss equities and the European health care sector to Attractive.
European equities are pro‑cyclical and sensitive to elevated oil and gas prices, as persistently high energy costs could undermine the manufacturing recovery. Meanwhile, India’s economy is highly sensitive to the price of oil. We see greater security in more defensive markets with secular growth and limited exposure to energy disruptions, including Switzerland’s equity market and the European health care sector.
Consider capital preservation strategies. Investors can also improve portfolio resilience by considering replacing direct equity exposure with exposure to strategies that offer a degree of capital preservation. A VIX of 26, at the time of writing, is not stretched by historical standards. And because interest rate expectations have risen since the start of the conflict, investors may still be able to achieve potentially attractive terms on strategies that provide exposure to a degree of upside while preserving capital.
Add to short-duration quality bonds. Despite the rally on Tuesday, we still see an opportunity for investors to “lock in” elevated short-term interest rate expectations with short-duration quality bonds. We expect a decline in yields either if markets begin to price a negative growth shock or if the conflict is resolved and short-term rate hike expectations are priced out.
Add to commodities, including oil and gold. Oil prices fell in trading on Tuesday, offering a potentially attractive entry point for investors looking to build exposure to oil in a portfolio and diversify equity and bond exposure. We believe oil prices will likely rise again if the Strait of Hormuz remains closed, or if the process of restoring energy flows proves more protracted than hoped. We also continue to view gold as an effective long-term portfolio hedge and forecast higher prices ahead. For those who favor gold, we suggest allocating a small portion—around a mid-single-digit percentage—of total assets, to diversify portfolios and provide medium-term insulation from macro-related shocks.