I am starting to think that Mr Trump waits until I have just completed all of our quarterly portfolio reviews before he decides to throw the world a curveball.
Then again, he does like throwing those curveballs with such regularity – we almost find it more unnerving when he’s quiet!
What started for me as a welcome weekend after a crazy few months – soon changed. On Saturday morning, we heard the US President announcing military strikes against Iran.
The choice was simple – so Mr Trump declared. Either the Iranian leadership lay down their weapons, stopped running the country and allowed the people of Iran to choose new leaders – or they would face ‘death’. No ambiguity there then.
Just one slight problem.
Consequences.
Taking out the Ayatollah Khomeini was a true demonstration of military prowess by the Israeli air force and intelligence services. In Mr Trumps’ simple scenario – the bad guys now lay down their weapons and declare something like ‘We would have got away with a nuclear weapon if it wasn’t for you pesky Americans’.
In reality, a heavily entrenched regime that sees itself as already pitched in a battle to the death, may only become more dangerous to predict in the coming months of war that could now lie ahead.
I really hope that I am wrong and that Donald is right. The US script says that the leadership of Iran will now capitulate and this will all be over within the week. I am just not convinced.
So, what can we expect from markets in the morning and how is that likely to affect your portfolio?
Perhaps my turn to simplify things.
This comes down to Oil prices.
Iran is registered as the fourth largest Oil producer within OPEC. On the face of it, this makes it a massive contributor to Western Oil dependency.
However, the combination of global sanctions and lack of investment means that they actually only account for around 3% of the West’s Oil requirements. So far so good.
Iran does export a lot more Oil to China. Much of this apparently is transacted via unmarked Oil tankers and so is hard to account for.
The White House may therefore have calculated that knocking out Iran’s Oil supply is no bad thing as it barely affects the West – whilst hurting China’s interests.
However, this is where the picture gets a little hazy.
The first question I would ask is ‘Where will China now buy its Oil if it can’t get Iranian product?’ The entry of a massive global buyer into the Oil market is hardly likely to drive down prices.
Secondly, ‘What happens if other countries surrounding Iran (and the vital Strait of Hormuz) can’t export their Oil due to the war?’ This could be the important question. Apparently, around 20% of the worlds’ Oil supply travels through the Strait.
When Oil prices rise, so does everything else that we realistically need like Food, Energy, Parts, Transport, Medicines and Materials.
In short, it’s about three things: Inflation, Inflation and Inflation.
Just what Kier Stammer and his team really wanted another dose of ….. I am guessing.
Unless the markets are incredibly sanguine about the weekends military activities, I expect Oil prices to jump tomorrow, coupled with rises in Bond yields and falls in Equity (Asset) prices.
Hopefully, this will be a short-lived experience.
The good news is that we prepare for these sorts of situations when building and checking your portfolio. This means that we have included funds that invest into Gold, Mining and Armaments within the more cautious Level One and Two Mainstream models. We have even put in place defensive options such as Cash holdings in our more cautious Ethical models.
Diversification will also play its part in the coming weeks. Negative correlation is something we constantly seek when building portfolios. In other words, we carry some funds and sectors through the good times – so that they give our clients a lift during the bad ones.
In conclusion then on this rainy Sunday afternoon – I’m not convinced that this military action will be over swiftly. I am expecting this to impact on Oil prices and therefore portfolios in the short term. However, we are well diversified and I expect we shall look back on this as just one of many curveballs that our dear American cousins threw at the world!
I hope that my short article has helped. As ever, we are here if you have any questions or worries at all. My very best wishes as ever.
Darren
