From the studio

Video: UBS Chief Economist: Oil price surge, inflation reality, and resilient US consumers (8 mins)
Video: CIO’s Min Lan Tan on what AI and geopolitical shocks means for APAC and EM equities (7 mins)
Podcast:Across the Pond: Trump, Iran, and the global ripples on Apple or Spotify (23 mins)

Thought of the day

Brent crude oil rose back toward USD 100 a barrel on Thursday morning as tensions in the Middle East escalated further. Two tankers were attacked in Iraqi waters, leading to a suspension of its oil terminals, while Oman has also evacuated a key oil terminal. This followed news that three vessels were hit in the Strait of Hormuz and the Persian Gulf. Asian and European stocks fell ahead of US market open, with S&P 500 futures pointing 0.5% lower.

While the International Energy Agency agreed to the largest-ever release of emergency oil reserves, the uncertain pace that these barrels will reach the market may only cover a fraction of the supply losses if the Strait of Hormuz remains closed for longer.

With US President Donald Trump suggesting the administration’s intention to complete its objectives and Iran warning of more damage to regional ports and docks, it remains challenging to assess when the disruption to oil flows will ease.

We continue to believe that maintaining a well-diversified portfolio will help ground long-term investors as they navigate the conflict. For those looking to more actively manage risks, we see strategies investors can implement to boost the resilience of their portfolios.

Utilize structured investments with capital preservation features. Substituting a portion of direct equity exposure with capital preservation strategies can help investors capture most of any potential gains while limiting potential losses. Typically, these instruments combine a zero-coupon bond—which returns the investor’s initial capital at maturity—with call options that provide exposure to potential gains in the underlying asset. Given their flexibility, which allows investors to tailor the degree of capital preservation and participation in rising markets, we think such approaches can make portfolios more resilient to volatility. However, investing in capital preservation strategies requires careful consideration of several factors, including maturity and liquidity.

Allocate to gold and alternatives such as hedge funds. Gold has historically provided protection from the monetary and financial effects that geopolitical events can cause, and we expect fears over rising global debt levels to continue to underpin demand for the yellow metal. Meanwhile, including an allocation to alternatives can improve diversification, growth potential, and insulate against market declines, in our view. Provided that an investor is willing and able to tolerate risks related to alternative investments, we believe certain hedge fund strategies can help steady portfolio swings given their focus on active risk management and flexible allocations, while private markets can offer return streams that are less correlated to public markets.

Develop a liquidity management strategy. Historical data shows that retreating from markets during periods of heightened volatility is unlikely the best strategy over the long term. But we believe holding sufficient liquidity to cover foreseeable expenses can help investors avoid forced selling in the event of a market drawdown. For everyday cash that is set aside for spending needs over the next year, we think deposit programs, money market funds, or certificates of deposit offer relative stability in exchange for modest yields. For core liquidity, which covers known expenses over the next 1-3 years, we think a bond ladder can provide predictable cash flows and mange interest rate risk. Investment cash, earmarked for needs up to five years out, can consist of medium-term quality bonds.

So, while the situation in the Middle East and its ultimate impact on global economies remain fluid, investors should approach portfolio management with discipline, diversification, and a focus on long-term objectives.