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Last week we circulated a note titled ‘Middle East Update’ outlining portfolio positioning and two potential scenarios regarding the evolving situation in the Middle East.
Over the weekend, the conflict intensified and broadened to include other Gulf states as well as non-military infrastructure. Importantly, Iran has also announced the appointment of Mojtaba Khamenei as the new Supreme Leader, succeeding his father, the late Ayatollah Ali Khamenei.
In short, the new Supreme Leader appears to be a continuity candidate, which shifted the balance of probabilities toward our Scenario 2 outcome – a period of prolonged disruption and stagflationary pressures.
On Tuesday, President Trump referred to the conflict with Iran as being “very complete, pretty much” which restore some calm to markets. This followed comments from the French Finance Minister that G7 nations were considering a coordinated release of strategic oil reserves to help smooth supply disruptions stemming from the conflict.
Overnight, confirmation emerged that the International Energy Agency (IEA) is coordinating a release of more than 180 million barrels of oil – the largest release on record. France and the US are also reportedly considering naval escorts for cargo ships through the Strait of Hormuz to partially re-establish flows through this vital trade corridor.
That said, Iran remains defiant and continues to threaten, and in some cases launch, missiles and attack drones targeting Israel, the US and regional neighbours.
So, what does this mean for portfolios?
We have increased cash in the United Portfolios by 10-12%, funded through a reduction in duration within the income portfolios and a trimming of cyclically sensitive equity exposures (primarily small and mid-cap holdings) within the growth portfolios.
While we do not hold a firm view on the precise trajectory of the Middle East conflict, near-term risks to equities appear skewed to the downside. The S&P 500 has declined only around 2% from its February highs, suggesting markets are vulnerable if the conflict persists.
Beyond the geopolitical backdrop, the macro environment has also softened at the margin. The US labour market weakened in February, concerns around private credit markets remain, and liquidity conditions are weaker than in recent months. Together, these factors point to a more fragile near-term market backdrop.
Building a modest cash buffer therefore appears prudent at this stage. It provides flexibility to deploy capital opportunistically, increase position sizes in preferred holdings over coming weeks, and strengthen the income base within the income portfolios where appropriate.
Looking beyond near-term volatility, the structural forces underpinning our medium-to-long term investment thesis remain intact. In particular: a US-led global productivity cycle, national security spending and supply chain investment, and gradual de-dollarisation.
We will continue to monitor developments closely over the coming days and weeks and redeploy capital when we judge the risk-reward to be appropriate.
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UA is committed to collaborating with and assisting our clients to achieve and surpass their financial goals. If you're considering your next move, be sure to contact us today!
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