CIO Update – Markets steady despite Middle East conflict

What’s happening in markets?

Market reaction has been relatively benign. The dollar and oil prices did rise though US equity futures were unchanged Monday morning. We do continue to see resilience in the broader data, including in the US economy which is largely energy independent and where we remain overweight in our investment allocations.

Markets are currently ~2% from their all-time highs, driven by solid economic activity, robust earnings growth, and an understanding that the worst-case tariffs fears from April are unlikely to materialise. Last Wednesday the Federal Reserve (Fed) gave a statement underpinning this, saying “recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate remains low, and labour market conditions remain solid”.

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short-term needs.

What are we doing?

This is obviously no time for complacency. Mitigating risk in markets means we constantly monitor global events and scenarios as part and parcel of our investment process.

Our Risk team assess a range of what-ifs constantly from systemic risk to market contagion to geopolitical risk. We are currently particularly focused on two possible outcomes, namely a proxy war in the vein of the current conflict versus a direct war, that involves more robust US involvement. This helps us assess how these respective situations, or variables within them, could impact trade and markets and how best we should react to them. We are monitoring these alongside more positive market scenarios such as de-escalation and negotiation.

Active diversification remains central to our multi-asset strategies, helping to reduce the impact of short-term shocks. Bonds have performed well as have our proprietary liquid alternative fund. This fund plays a key role – targeting areas with low sensitivity to traditional equity and bond markets – strengthening portfolio stability in uncertain times.

Our view

Despite the distressing news from the Middle East, from an investment perspective, these are the signals that matter to long-term investors: the estimated risk premia on offer, the state of the underlying macro fundamentals (growth, policy, and inflation) and the expected path of corporate earnings. For now, as the Fed summarised, and our ‘Anchor & Cycle’ framework supports, conditions remain favourable for risk taking.

Our base case is for a limited shock which won’t derail markets over the medium to long-term. Looking at the data, we can see that historically, markets quickly get used to uncertain environments and have a strong track record of recovering from similar periods of volatility. Recent price movements may similarly create opportunities for investors. When there is a sudden shock we can see adverse reaction in markets, but they can and do recover, as shown by the below chart. We’ve already seen this happen this year in the months following President Trump’s ‘Liberation Day’ in April as markets made a full recovery.