At a glance
- So far, the latest bout of geopolitical uncertainty, triggered by the Israel-Hamas conflict, has had a moderate and short-lived impact on markets. While oil prices did rise at the end of last week, they remain lower than a month ago. Equities did rise, though several market sessions were rather volatile. Bond prices rose slightly, perhaps a sign that of investors turning more cautious. Our flagship portfolios followed suit and ended the week up.
- We believe the main market risk is if the conflict broadens to other countries in the region. This could impact oil flows and, in turn, push inflation higher. This matters because a spike in inflation could lead to a decline in the price of riskier assets, such as equities, if central banks decide increase interest rates further or investors start to focus on slowing economic activity.
- Should this occur, investors would likely turn to safer assets such as high-quality government bonds and low-volatility stocks, both of which we hold in portfolios to a greater extent than in our typical long-term allocation. This defensive positioning allows us to partly absorb market shocks (such as the past week’s events) and, if sustained, even outperform, as was the case this year in March when the US banking sector faced some turmoil.
How we’re positioned in flagship portfolios
- Our portfolio positioning has not changed. We still hold more high-quality government bonds and fewer stocks relative to our long-term strategy. Most of the stocks we hold are in the US, a high-quality market, and we also have exposure to low-volatility stocks.
- While this defensive positioning was not necessarily set up with a rise in geopolitical tensions in mind, it does provide a cushion should market volatility continue. Our short-term view, and one key reason for our defensive positioning, is that a mild recession is likely in the UK, Eurozone and, to a lesser extent, the US. As growth slows, equities tend to come under pressure (hence, we hold fewer equities than normal), while high-quality government bonds tend to provide a good return for a relatively low risk (hence, we hold more government bonds than normal).
- It’s worth noting that, given our sustainable investing policy, we only have a relatively minor direct exposure to the oil market. So, should oil prices rise, we will focus on the impact that this will have on other asset classes to seize opportunities and mitigate risks.
What we’re watching
- Last week, US headline inflation for September was slightly higher than the consensus expected, while core inflation (excluding food and energy) eased. US retail sales data is out this week. Investors will focus on whether the summer spending splurge has now subsided, and the economy is slowing. This will likely affect what the US Federal Reserve does next with interest rates. We think we’re at or close to the peak in interest rates.
- UK inflation data is also out this week. Economists expect it to have slowed again, though it may have remained too high for the Bank of England’s liking. While we see the possibility of an additional increase in the Bank Rate, a steeper-than-expected decline in inflation could cement the view that interest rates have reached a plateau in the UK.
- Finally, the Q3 economic growth report for China is out on Wednesday this week too. We expect that the lacklustre economic trajectory we’ve seen recently has continued. We recently lowered our exposure to Asia-Pacific equities due to increasing woes in China’s housing sector and the lack of meaningful policy support from the People’s Bank of China.
Past performance is not a reliable indicator of future returns.
Data as of 13/10/2023. The Yield and P/E figures for stock markets respectively use 12m forward dividends and earnings divided by the index’s last price. For bond markets, the yield to maturity is used.
Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg does not approve or endorse this material or guarantee the accuracy or completeness of any information herein, nor does Bloomberg make any warranty, express or implied, as to the results to be obtained therefrom, and, to the maximum extent allowed by law, Bloomberg shall not have any liability or responsibility for injury or damages arising in connection therewith Note: Past performance is not a reliable indicator of future returns.