Energy, inflation and markets: key takeaways for investors

March proved to be an intense month around the world and in financial markets. Our Chief Investment Officer, Richard Flax, explores more in our latest monthly update video. You can also find a written version of his commentary below.

The Middle East conflict continues to dominate the headlines, as the US, Israel and Iran continue to trade strikes. The Strait of Hormuz has been largely closed, and that’s helped to drive the price of oil above $100 per barrel. Higher energy prices can act to raise inflation and reduce growth and that’s a challenging scenario for investors.

The situation remains uncertain – we could see the Strait gradually re-open but there’s still the potential for the conflict to escalate. In any event, the longer energy prices stay high, the greater the impact for the global economy. 

In terms of financial market performance, we saw some equity market weakness, with global equities down around 7% in the month. We think investors overall expect the conflict to be relatively short-lived with a limited impact. That’s an important assumption. The longer the conflict continues, the greater the impact on the global economy. 

Digging into the details a bit more, there are some interesting points to highlight. First, bond yields generally rose – driven by concerns over inflation. So long-dated government bonds didn’t provide much diversification. Shorter-dated bonds were more helpful. Gold was also interesting. Looking at history, you might have expected gold to act as a safe haven, but on this occasion gold was among the weakest performers in March. We think that’s partly because of investors taking profits after its strong performance over the past year. 

Question for the month

What are we being asked about? There are a long list of important questions, most of which are very tough to answer. The most obvious one is: how long will this last? It’s tough to know – the conflict has become more complicated as Iran has struck back not only against the US and Israel, but against a range of Gulf states. Attacks on energy infrastructure mean that it will take longer for energy production to recover once we do see a de-escalation. That said, the biggest focus of attention is on the passage of ships through the Strait of Hormuz and here we have seen some small signs of progress.

Data for the month

We already mentioned the price of oil going above 100 USD/barrel. But the other notable figure was 5%. The UK 10-year government bond yield briefly went above 5% in March, reflecting concerns about higher inflation and the prospect of interest rate hikes. The higher cost of government debt makes life tougher for the chancellor as she tries to free up cash to spend on public services.

As we think about portfolio positioning, there are a few points to consider. We’ve seen bond yields rise quite sharply in recent weeks. Having sold longer-dated UK government bonds around the start of March, we’re now debating whether we should look at them again. It’s been a challenging few weeks, particularly for bond investors, but we continue to believe that a long-term focus and a well diversified portfolio remain key to navigate through this latest bout of market volatility.