The recent conflict in the Middle East has injected fresh uncertainty (and volatility) into global financial markets. We are sharing some perspective.
Wars are often unpredictable and how this one will play out remains to be seen. We know we don’t know. But history indicates that the impact will likely be limited and temporary unless market perception shifts to a belief that it will seriously threaten the global economy.
Indeed, a prolonged conflict could lead to a sustained rise in oil prices, fueling inflation that could undermine economic growth and push up US retail gasoline prices as well.
Fortunately, the global economy was in good shape and growth momentum seemed to be improving prior to the war. This, combined with ongoing accommodative monetary and fiscal policy, could temper the downside risks.
For energy prices, much will depend on the extent and duration of transit disruptions via the Strait of Hormuz, through which around one-fifth of global supply for oil and liquified natural gas normally flows.
Against a backdrop of increased volatility, we’ll seek to be opportunistic by taking advantage of any attractive risk/reward opportunities that may arise. For now, our portfolio positioning themes remain the same.
- Due to concentration risk and stretched valuations, we continue to recommend an underweight position in US large cap stocks in favor of small caps and non-US markets.
- We also maintain a slight overweight position in real assets, such as commodities and natural resource stocks, that can offer a potential hedge against inflation. Prior to the recent conflict we felt inflation risks may be under-appreciated by market participants.
Please don’t hesitate to contact us with questions or if you’d like to discuss.
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