After US stock and bond markets bounced, and oil prices fell on Monday when US President Donald Trump announced a five-day postponement of previously-threatened military action against Iranian energy infrastructure, wealth managers discuss the impact on asset allocation.

The S&P 500 rose 1.1 per cent on Monday, Brent crude oil prices fell 10.6 per cent to $100 per barrel, and gold pared heavy losses to trade about 3.6 per cent lower on the day, at $4,411 per ounce, showing how quickly markets can react to events. The shift in tone was interpreted by markets as a step towards de-escalation in the conflict.

However, caution has since returned as Israel is continuing its attacks. Markets are watching to see whether the Iran pause becomes actual de-escalation or just a shorter fuse. “For the moment, it looks like most are just standing aside to see what happens, or doesn't happen, next," Chris Beauchamp, chief analyst at IG Group, said yesterday.

UBS Global Wealth Management sees Monday’s market gyrations as validating its view that investors should not attempt to trade geopolitics and should maintain equity holdings. Markets are forward-looking and can often trade on the “second derivative.”

“While we retain an attractive stance on equities overall and believe investors should retain strategic exposure to the asset class, we downgrade European, eurozone, and Indian equities to neutral,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a note yesterday. “We also upgrade Swiss equities and the European health care sector to attractive,” he added.

India’s economy is highly sensitive to the price of oil, 88 per cent of which is imported. While its energy supply chain is diversified, with imports from Russia and the US, 40 per cent comes via the Strait of Hormuz,” Haefele continued. “Along with crude, India is also heavily reliant on liquefied natural gas and liquefied petroleum gas from the Middle East. Higher energy prices look set to widen the current account deficit, add to fiscal pressures, and slow growth.”

He sees greater security in more defensive markets with secular growth and limited exposure to energy disruptions. Against this background, he upgrades Switzerland’s equity market and the European healthcare sector to attractive. Both markets are down by more than 10 per cent since the start of the conflict, despite typically being less volatile markets, leaving valuations relatively appealing, in his view.

Gold
Although the price of gold has fallen significantly since the start of the conflict, with higher rate expectations weighing on sentiment, over the medium term, Haefele still expects gold to rally substantially if geopolitical uncertainty remains high while interest rate expectations come down. Haefele continues to view gold as an effective long-term portfolio hedge and forecasts higher prices ahead.

This was echoed yesterday by Carsten Menke, head of next generation research at Swiss private bank Julius Baer. “Precious metals’ weakness since the start of the Iran war shows how much of a crowded trade they have been before. Fearing a harsh central bank reaction and facing forced selling, traders are exhibiting herding behaviour,” Menke said. The absence of safe-haven seekers in the gold market is concerning but sound central bank buying is comforting. He remains constructive on gold and neutral on silver.

Meanwhile, Eirini Tsekeridou, responsible for fixed income research at Julius Baer is keeping his neutral stance on emerging market sovereigns and his overweight stance on emerging market corporate debt, with a credit quality and shorter duration tilt, given the uncertainty in central bank policy trajectory.