When America and Israel started dropping bombs on ‘targets of the regime’ in Iran, I must be honest in saying I was a little fearful.
Whilst the rhetoric from the American administration was that this would be a quick and limited operation – I just wasn’t convinced.
In my emergency article on the 1st of this month, I explained that Oil prices dictate inflation and inflation dictates the global economy. Markets despair of inflation.
The trouble with inflation is that it creeps up slowly but it takes forever to remove. How often have we seen ‘experts’ proclaim that inflation is just a ‘blip’ that will correct in a short time period?
Yesterday, we saw inflation in the US (PPI index) surprising everyone – coming in at 3.4% on the year to February when it had been forecast to be around 2.9%. This is a sizeable difference.
More importantly, this rapid hike in inflation will not include any of the effects of the Iran war. Indeed, I wouldn’t expect to see the impact of the recent Oil price explosion feeding through until the Autumn at the very earliest.
The inflation numbers yesterday were likely caused by President Trumps Tariffs. His latest adventure will take longer to show its affects – probably just in time for the US mid term elections.
Thankfully for markets, the rest of the world has chosen to stay back from this conflict. Escalation is therefore down to how much Mr Trump wants to keep building inflation in to his own economy…..my guess is that he is now running on a fairly short time frame before he will claim a victory and back out of a decimated Middle East.
So, what do these facts (and my assumptions) mean for our treasured clients’ portfolios?
Well, the damage caused by the Iran war is likely to be far more widely felt for a whole lot longer than Mr Trump is telling us. Inflation was already heading in the wrong direction in the US – and the ‘epic fury’ episode will only fan the flames.
Central Banks such as the Federal Reserve in the US, the Bank of England and the Bank of Japan are very unlikely to now cut interest rates as had been expected.
This means that Bond markets (Government and Corporate Bonds) will struggle at least in the short term – as they rely upon interest rates remaining steady or even falling. This has already had a negative impact upon our more cautious portfolios.
The Iran war, however, has also wreaked havoc in Emerging Markets and Asian funds. This is because these economies need cheap or steady Oil prices and a weaker US Dollar to thrive. This was all going swimmingly well until ‘epic fury’. Now, we have seen some falls in our more adventurous portfolios because of this.
The good news is that actually our client portfolios have not taken the kind of ‘hit’ we would have expected so far. We believe that this is due in part to the caution of allied nations to join in the US/ Israeli operation.
It is also due to the fact (I believe) that the US Administration have genuinely been caught out by the aggressive response from the Iranian regime who have gone straight for the global economy jugular by bombing energy in retaliation. Weirdly, I think this will lead to the US President cutting this operation short.
If our assumption is correct and the US manages to extrapolate itself from the war in the coming weeks, we will expect to see global inflation still rise around Autumn and hold for longer. This realistically prevents those central banks from cutting interest rates and so the chance to make money on the back of loose monetary policy is once again denied us in 2026.
However, (in this scenario) we also would then expect portfolios to experience an initial rebound and to then manage to modestly sail through a trickier economic backdrop over the coming year or so.
The picture is currently fast moving and it is so difficult to guess which way things will go. However, I hope that sharing my thoughts with you once again will offer some reassurance and insight into how things are holding up.
As ever, we are here for you through the tough times. There’s been rather a few of those over the past six years! However, investing still has definitely paid off for those with patience and a plan. If you need anything at all – please don’t hesitate to ask us.
My very best wishes as ever. Darren
