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Iran appears to be heavily outmatched by the US and Israel, and its military leadership and proxy militias across the region have been significantly degraded. This raises the possibility of a relatively swift military outcome or even regime destabilisation. In that scenario, selling assets we favour risks leaving portfolios underinvested ahead of a potentially sharp recovery rally.
Another possibility is that the Iranian regime consolidates power internally while periodically disrupting oil supply routes to divert attention away from Tehran. Depending on how long this disruption could be sustained, this would likely feed into higher inflation expectations and stoke stagflation fears.
The simple truth is that we do not know how this situation will evolve.
Stepping back, even under a relatively benign scenario these developments come at a more fragile moment for markets. Appetite for duration and fixed income is more subdued than in prior cycles and therefore vulnerable to further price falls should inflation pressures intensify. This is why we are reducing duration in the income portfolios to help shield against a 2022-like scenario. We will continue to monitor developments closely over the coming days and weeks before taking any further action in portfolios.
Importantly, the structural forces that have supported our investments over the past year - namely a US-led global productivity cycle, national security-driven increases in defence spending and commodity supply chain investment, and gradual de-dollarisation, remain intact and should continue to support asset prices over the medium term.
The combined US and Israel attack on Iran creates the potential for a material risk-off and stagflation scenario.
Firstly, it is important to note that the United Growth and Growth Plus portfolios have been positioned for geopolitical shocks for some time, with allocations to gold, global energy companies, defence stocks and commodities that benefit from increased defence spending as well as AI-driven demand. This is not to say that we anticipated this particular event, however the portfolios have been positioned for a higher geopolitical risk regime. If anything, recent developments in Iran further validate these thematic views, and any volatility presents an opportunity to selectively increase these allocations.
The United Income and Income Plus portfolios are also naturally less duration-sensitive than the retail peer group. Yesterday we took further action to reduce duration, selling an ETF of ~10-year Australian government bonds and reallocating to a combination of FRNs and cash. These portfolios remain susceptible to some short-term volatility, however this positioning allows us to redeploy capital at more attractive levels while also targeting higher income-generating assets.
The way we have been positioned for several months, and the resulting performance, enables us to act with a patient and opportunistic mindset.
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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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