Portfolio resilience remains key despite US-Iran deal optimism
CIO Daily Updates
From the studio
From the studio
Thought of the day
Thought of the day
Global equities rallied this week on signs of de-escalation in the Middle East, with the MSCI All Country World index rising for a 10th straight day on Thursday to reach new record highs. US President Donald Trump said the prospect of making a deal with Iran is "looking very good," that the war should end “pretty soon,” and that talks between Washington and Tehran could resume this weekend. A 10-day ceasefire between Israel and Lebanon also went into effect.
But the pause in hostilities remains fragile, with the Lebanese Army reporting early Friday that Israel violated the ceasefire amid the intermittent shelling of several southern Lebanese villages. Whether further US-Iran talks this weekend would yield any meaningful resolution to the conflict remains to be seen, and the Strait of Hormuz is still effectively closed. Investor concerns over inflation, growth, government debt, and AI disruptions are all likely to persist.
We have held the view that global equities will end the year higher than their current levels, and we believe investors should maintain diversified equity exposure across sectors and geographies for medium- to longer-term gains. We also believe the most effective way to navigate an uncertain environment and potential volatility is through portfolio diversification and hedging.
In addition to the compelling risk-reward profile of quality bonds, we see value in diversifying beyond traditional asset classes as well as structured strategies.
Gold and broad commodities can provide a hedge against inflation and serve as a useful portfolio diversifier. Gold has recovered from its late-March lows, and we think the yellow metal will continue to benefit from structural support. Solid central bank demand, global investors’ efforts to diversify away from the US dollar, and elevated government debt around the world should all be supportive. Further Fed easing later this year should also add to gold’s appeal. Meanwhile, we expect Brent crude oil to remain above USD 90/bbl until the end of this year as the normalization of energy flows from the Strait of Hormuz will take time. We also hold a positive outlook on industrial metals like copper and aluminum as they are the backbone of the secular trend of electrification.
Alternatives offer less-correlated return and income streams. Alternative investments remain valuable in long-term portfolios, offering differentiated returns and diversification beyond traditional assets. Select hedge funds can enhance diversification through lower correlations, active risk management, and adaptability to changing macro and geopolitical conditions. Private market strategies may also provide longer-term income and additional diversification. Investors, however, should stay selective and align allocations with their liquidity needs and risk objectives.
Structured strategies can help investors navigate potential volatility. Structured strategies offer investors tools to tailor their equity exposure according to their market outlook and risk appetite. For example, put warrants can help maintain equity exposure while limiting potential losses. Capital preservation notes offer investors a way to balance risk and opportunity by limiting potential downside while having the exposure to a potential recovery. Reverse convertibles, meanwhile, help generate yield in parts of the equity market where implied volatility is above average. Investors should also be willing and able to bear associated risks such as issuer default and liquidity constraints.
Overall, we maintain the view that investors should avoid making large, abrupt shifts to their strategic portfolio allocation in response to geopolitical events. They should, however, consider hedging and stay invested through a well-diversified portfolio across sectors, asset classes, and geographies to enhance portfolio resilience.