There have been big moves across the price of shares, funds, bonds, oil and more over the past week after the US and Israel attacked Iran. US President Donald Trump has indicated the campaign could last several weeks, but it could extend beyond this timeframe with no ceasefire in sight.
The situation has caused disturbance in markets, and while this is secondary to the human cost of any conflict, we want to provide investors with information to help them. If you hold AJ Bell’s multi-asset funds, your money is spread across a range of different assets and sectors. That diversification is doing its job right now.
Back in January, we increased holdings in US healthcare, energy and utilities sectors in AJ Bell funds. This was done because these sectors looked good value compared with the wider US market – they had been overlooked while technology and AI stocks were getting all the attention.
These positions now look well-suited to weather the conflict, even though they were not chosen because of any geopolitical forecast. Energy companies benefit directly when oil prices rise. Healthcare and utilities companies tend to have steady earnings that are less affected by economic disruption, making them a useful buffer when parts of the market that are more sensitive to geopolitics are under pressure.
The AJ Bell funds hold bonds with a shorter lifespan, which means they are less sensitive to rising interest rates and inflation expectations because there’s less time for changes in these rates.
This matters now because if the price of oil stays high for a sustained period, inflation could rise again, and bonds with longer periods until they mature would likely fall in value. By keeping bond holdings with shorter maturity periods, the AJ Bell funds are better protected against inflation risks.
How have markets reacted?
Oil prices have jumped by 17% to $87 per barrel since the start of the week on fears of disruption to supplies. Gold initially moved higher as investors sought assets with safe-haven qualities, yet the metal is now trading 3%% lower on the week at $5,118 per ounce. That’s partially down to investors selling what’s already done well for them, and a stronger US dollar, which makes gold more expensive for buyers of other currencies.
UK equities have fallen by 4% in the week to 6 March. Despite this week’s pullback, the UK market remains up roughly 5% for the year so far. Oil and defence-related companies have risen, but airlines, banks, hotels and travel companies have been hit hard.
European markets have fallen by a greater amount as they are seen as being more vulnerable to the conflict. The US equity market has been more resilient, with sharp intraday falls followed by partial recoveries. Asian markets including Japan and South Korea have sold off more; however, they have been top performers recently.
Government bonds have seen mixed moves. Longer-dated bonds have come under pressure as markets price in the risk of higher inflation from sustained energy price rises. Shorter-dated bonds have held up better, reflecting expectations that central banks may need to keep interest rates higher for longer rather than cut them.
Broadly speaking, high quality corporate bonds have been relatively resilient so far, but a prolonged conflict may start to weigh on these companies as well.
What could happen next?
Nobody can predict how long this conflict will last or how it will end. But here are the broad scenarios to keep in mind:
If the conflict drags on and the Strait of Hormuz remains disrupted, oil prices could keep climbing. That would push up the cost of petrol, heating and goods generally, feeding into higher inflation. Central banks might have to hold interest rates higher for longer or even raise them to compensate. In this scenario, the AJ Bell funds’ energy exposures and short-dated bonds would provide some protection.
If the conflict is resolved quickly and oil prices fall back, the sector allocations in the AJ Bell funds still make sense on their own merits. Healthcare, energy and utilities all remain attractively valued compared with the broader US market and have the opportunity to benefit from AI advancements, as well as other long-term themes. The short-dated bond stance is also grounded in a longer-term view that inflation uncertainty was already underpriced before any of this happened. The current circumstances have only upped the stakes.
In other words, the funds are not relying on the war to justify their positioning. They were built for a more uncertain world – and that’s exactly the world we’re in.
What should I do?
It is natural to feel uneasy at times like this. The instinct to do something with your investments is understandable, but acting on that impulse can often hurt your investments more than it helps.
History shows that the global market has recovered from every major geopolitical shock – including wars, financial crises and pandemics. That doesn’t mean the path will be smooth, but investors who stayed the course and remained invested in the market for the long term have consistently been rewarded.
The AJ Bell funds are already diversified and positioned for uncertainty. We manage the funds with the long term in mind, so if the goal for your savings is still years, or even decades, away, short-term volatility matters much less than your long-term plan.
James Flintoft: Head of Investment Solutions
James has over a decade of experience running MPS and managed accounts for intermediaries. After graduating from Northumbria University with a first class degree in Finance & Investment Management, James joined a regional DFM, where...
