Last weekend I got the new lawn mower out – electric in case you are wondering (so on message) – and watched the B-52s and F-35s flying over, as I live near RAF Fairford. This has my wife, Tracey, concerned now that the Iranian Ambassador has said UK airbases are legitimate targets. Air raid sirens over Swindon are unlikely, however. Not because Iranian missiles can’t reach that far, but because someone from the Swindon massive will have nicked the copper cables.
I’m joking – I think, copper theft is big business round here – but obviously this conflict is no laughing matter, despite the almost comical communiques coming from both sides. I particularly liked the Iranian PR release stating the Americans were negotiating with themselves.
All of us on the multi-asset team have refrained from making too many comments on the conflict, as we’re not defence analysts or privy to the inner workings of President Donald Trump’s mind. I’m not about to predict the outcome here, either; however, almost five weeks in, with a nascent ceasefire declared, I feel there are some key takeaways.
1. Oil dependency is still a thing
Despite the rise of Green parties in Europe and the UK Government’s self-denial, oil still drives the global economy. Obviously, it’s not just the stuff we put in our cars or use to heat our homes, but all the products we use in everyday life that support modern living: from electronics, like smartphones and TVs, through to the vegetables we eat, which are delivered by diesel lorries. This conflict has demonstrated that, for the foreseeable future at least, talk of ‘stranded’ oil and gas assets is over.
Until this changes, it makes sense to keep hold of a decent exposure to the oil industry. The rise in oil majors’ share prices during this conflict has helped offset the falls elsewhere in our portfolios. They were a much more effective diversifier than bonds or other alternative assets such as gold – and let’s stop talking about silver.
It demonstrates, yet again, the need to find alternatives that truly diversify portfolios. I think the interest in renewables will be much higher and will attract investment again, and yes, I also see much more investment in nuclear. All for the better.
As we have always said, a spike in the oil price is deflationary in the medium term (it’s a tax on growth after all): it often results in recession, puncturing demand. In the short term, much of this spending is non-discretionary, so it’s usually something else that gives way within the household budget. It’s interesting to note, however, that consumer staples haven’t fared well during the recent equity market turbulence.
When you invest your capital is at risk and you could lose some or all of your investment. Past performance should not be seen as an indicator of future performance.
2. UK and Europe lack control
Both in military and energy terms, Europe looks incredibly vulnerable once again. This is due to many years, if not decades, of complacency. The expectation that the US would jump to Europe’s defence and Russia could be relied on for energy stability now looks ludicrously naïve in a Putin/Trump world
Surely, this is the wake-up call. Renewed investment in defence and nuclear energy must be forthcoming and quickly. Both would support growth, too. The challenge, of course, is to wean the electorates off unsustainable welfare spending subsidised by profligate governments of all colours over the past 20 years or so.
While it’s hard to be uber-bullish on this, I do think it’s time to add more defence and nuclear exposure to portfolios.
3. Trump is driven by the S&P and Treasury yields
It’s noticeable how often during this conflict, Trump, either at a news conference or a message posted on Truth Social, has looked to calm markets. These attempts were usually triggered by a spike in the oil price, the Treasury yield, or a significant fall in the S&P 500. This has been the playbook throughout his second term. Some call this the TACO trade (Trump always chickens out), but it aligns with his key objectives. He needs to manage the cost of living as this is the key electoral issue in the US, with the November midterms edging ever nearer. Should we call this the Trump Put?
So far it seems to work. This is no doubt behind the ceasefire that he negotiated on 7 April. Although the problem now is that with Iran he’s dealing with a regime that’s quite happy to facilitate a global recession. The question is: can he end the war in the next two weeks to avoid a recession, irrespective of whether the initial objectives have been met? My intuition says yes. The markets don’t care if the Iranian people suffer, as long as the Straits are open. Trump will claim victory, whatever the facts say, and will move on to the next disruptive policy. Unedifying? Certainly, but geopolitics is always self-serving, and stock markets don’t have empathy.
4. Asia may pivot even more to China
As the US becomes an increasingly unreliable partner, we may see Asian countries align even more with China in technology and commerce. You might think this unlikely due to the threats to Taiwan. Please see above – “geopolitics is self-serving”.
Remember, there’s a conflict right now between Thailand and Cambodia. In the UK, we tend to talk about Asia Pacific (ex-Japan) as if it were a homogeneous investment zone. It’s far from it, and I think there will be some opportunities for growth as global businesses look to align with the Chinese technology stack and economic sphere. The risks are well documented, but we need to recognise the shift, especially given the dominance of US companies in our portfolios. A bit more geographic diversity may dampen some of these risks.
These are just four long-term possible structural trends that could emerge from this conflict. There may be more that becomes apparent over the next few months or years. We need to construct portfolios that are more balanced between the US and Asia (including China and India). At least until we see a major shift in US policy. By the way, don’t expect the Democrats to become warmer and cuddlier towards Europe. They also feel Europe needs to be less reliant on the US taxpayer.
What about Europe? Yes, what about Europe? For now, they seem like the squeezed middle. That’s never a great place to be. We need braver politicians and more strategic thinking, rather than simply dashing from one crisis to the next. I’m just not seeing it right now.
So, for now I continue to suffer sleepless nights, thanks to Donald’s tweets and his air force. Why do they need to take off at five in the morning? Most inconsiderate. My message to Trump RE communications and disruption – please stop.
Thank you for your attention to this matter. Fund Manager DAVID J. COOMBS.
