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Market update: The impact of tensions between the US and Iran

 

Richard Flax, Chief Investment Officer

It’s fair to say that 2019 was a better year in financial markets than most people had expected. Double-digit returns across most equity markets and a solid performance in fixed income supported a strong performance in Moneyfarm portfolios.

To a large extent this was driven by the change in US monetary policy. At the end of 2018, the US Federal Reserve was still engaged in hiking interest rates. By the middle part of last year, they changed tack completely, cutting rates to support growth.

This provided a supportive backdrop for most financial assets and also raised the possibility of better economic growth going into 2020.

Tensions in the Middle East

Geopolitical concerns have been a feature of the global environment for some time. The US Iranian conflict has been bubbling along in the background for the last couple of years and it is now very much in the forefront, raising concerns about the potential for a broader regional conflict. However, we don’t believe this will play out.

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We think both sides will try and deescalate the situation, at least in the short term, even if the medium- to long-term issues are still very much with us.

When it comes to financial markets, we expect an escalation in tensions to have a negative impact on risky assets like equitiesOil prices could rise significantly, particularly if we saw any action to close the straits of Hormuz. Significantly higher oil prices could have a negative impact on economic growth and inflation.

Given that we expect both sides to deescalate the tensions, any market volatility should be relatively short lived. Nonetheless this is a fluid situation and we continue to monitor it closely.

If we can get past the current crisis in the Middle East, the overall outlook for 2020 looks decent. We don’t think it is going to be as good a year as 2019 but the backdrop is pretty good.

We could see slightly better economic growth helped by lower interest rates. Corporate profitability, while not quite as good as it was, is still pretty robust and although we do see some parts of the market where valuations are a bit stretched, overall the picture is fairly positive.

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