CIO Strategy BulletinArticle14 Apr 2024

Geopolitical Shocks, Inflation, and the Patient Portfolio

CIO Strategy Bulletin

Since the release of our Wealth Outlook for 2024 in early December 2023, markets have enjoyed nearly the perfect combination of slowing inflation, rising corporate profits and falling interest rates. Sadly, such conditions never last indefinitely. A full quarter of rebounding inflation data has created greater uncertainty and caused interest rates to rise. Last week’s setback in the US bond and stock markets has nonetheless been limited, but the “Goldilocks consensus” period has passed.

Middle East News Update, Likely Market Reaction

  • Iran’s direct attacks on Israel via missiles and drones is a material escalation of an intensifying regional conflict. For markets, the event was well-anticipated and the initial reports of casualties from the bombardment were few. This may limit the response in financial markets, with crude oil still likely to have a large initial move.
  • This was the first direct state-to-state attack between Israel and Iran after the events of October 7, 2023. This changes the parameters of the regional conflict. In such events, the initial reaction is very often an “overshoot.” The oil price - a key metric for global impact – typically moves as a multiple of any feared production loss, followed by a drop.
  • Tragic military conflicts and global growth have co-existed through most periods. While markets will recalibrate future risks over the coming days, rarely do such events change the direction of the world economy.
  • As we discussed in Wealth Outlook for 2024, security risks to world oil supplies represent a danger, and energy-security investments deserve a larger place in portfolios than otherwise. At the same time, the majority of the world’s petroleum supplies no longer rests in the hands of one cartel or country and the possibility of an inflationary recession as seen during the OPEC embargo of 1973/1974 is notably less.

Market Update: US Inflation Scare

  • The US Consumer Price Index (CPI) rose for a third consecutive month in March exceeding expectations and stoking inflation fears. The Fed says it needs confidence that its preferred measure of inflation is lastingly on its way back to a 2% trend pace. This means a rate cut before July is unlikely.
  • An “inflation scare” is creating opportunities in High Grade intermediate bonds which we believe offer good value to investors in this current environment. Equity risk hedges – for suitable investors – also appear attractive and historically cheap.
  • We believe investing in economic development – generating capital appreciation and income – is still the paramount opportunity for wealth preservation and growth. The precise number of rate cuts in the remaining 8 months of 2024 is trivial by comparison.

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