Escalation in the Middle East: How we protect your portfolio – and what you should do now

In last week’s article, we already discussed the growing tensions in the Middle East. Since Saturday, the conflict has developed into open military confrontation. Geopolitical events such as these understandably cause concern – primarily, of course, for the people in the region, but also with regards to developments in the near future: what could this mean for the real economy, interest rate trends and,ultimately, for our own investments?

In the following, we would like to explain transparently what has happened, how we are actively protecting your portfolio during this phase and why prudence on the markets is now your best guide.

What exactly happened?

On February 28, the USA and Israel launched a large-scale series of strikes against military targets in Iran. These attacks were directed against, among other things, leadership structures, the Revolutionary Guards (IRGC), air defences, and missile and drone facilities. The country’s spiritual leader, Ayatollah Ali Khamenei, was also killed, as Iran confirmed on Sunday night. What is clear, in any case, is that key complexes were severely damaged. Iran responded immediately with its own missile and drone attacks on Israel and US bases in the Gulf states, which led to temporary closures of airspace.

For the global economy, all eyes are now on one particular bottleneck: shipping through the Strait of Hormuz. We can already see oil tankers increasingly avoiding the route and insurance premiums for cargo ships rising significantly.

What does this mean from an economic perspective?

In the short term, these uncertainties could cause oil, gas, and transport prices to rise. This could slightly pull up inflation and temporarily weigh on equity market sentiment. Our base-case scenario (with a probability of about 60%) hinges on the premise that we will only see a slight economic slowdown and no lasting disruption in the Strait of Hormuz. Initial estimates suggest that oil prices could rise significantly by USD 5 to 7 per barrel when the markets reopen on Monday. At the same time though, OPEC’s announcement that it will increase production could have a dampening effect on prices. As long as global shipping remains largely intact, we expect this initial “oil premium” to normalise again. We also believe that central banks (such as the European Central Bank (ECB) and the US Federal Reserve (Fed)) are likely to stick to their guns for the time being and only consider interest rate cuts in the event of genuine stability stress.

How are we responding in the portfolios?

We currently regard our funds and portfolios as well positioned for the current market phase. In general, we are slightly defensive in our portfolios and funds, with an equity allocation that is in line with our strategic orientation. Our gold allocation should also act as a counterweight to the current geopolitical shock. Investments in money market instruments dampen volatility as well while at the same time allowing us to seize opportunities that may arise from the turmoil.

What do we keep an eye on for you?

In order to be able to adjust our risk management at any time, we keep a close eye on the most important economic early warning systems:

• Global trade routes: we closely monitor whether shipping traffic through the Strait of Hormuz is functioning properly and how global transport costs and insurance premiums are developing.
• Energy markets: instead of focusing on short-term price fluctuations, we pay attention to indicators that give us early warning of longer-term shortages in the oil and gas market.
• The economic situation of companies: we are constantly monitoring whether the current uncertainty is leading to more expensive loans for companies, which could slow down the global economy.

Our recommendation for you: Keep calm

Even though the news flow may seem threatening at present, political developments on the financial markets are often only short-term in nature. For you as an investor, it is now important to pursue the following approach:

• Think long term: keep your investment goals in mind. Tactical knee-jerk reactions and panic-selling usually do more harm than good to long-term wealth accumulation.
• Stay calm: diversify your investments and keep an eye on your return opportunities. Solid diversification across different asset classes is the best buffer against geopolitical fluctuations.
• Seek dialogue: it is completely normal to feel uncertain in such phases. Do not hesitate to consult your adviser to clarify questions about your individual position. 

Please note: investing in securities involves risks as well as opportunities.

 

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