Chapters
00:00 Introduction and Market Overview
00:36 Impact of Middle East Conflict on Oil Prices
01:34 Market Corrections: Normal or Concerning?
03:10 Market Movements in Context
04:20 Saltus Portfolio Performance Year to Date
05:14 Comparison with Past Crises: Tariffs and Ukraine
07:18 Active vs Passive Portfolio Performance
08:38 Future Outlook: Short-term Shock or Long-term Issue?
10:30 Investment Strategy in Uncertain Times
11:22 Conclusion
Hello, my name’s Jordan Gillies. I’m one of the partners here at Saltus, and I’m joined by David Cooke, our chief investment officer. We thought now would be a suitable time to give you an update on the war in the Middle East, given what’s happened in markets over the weekend.
So David, thanks for joining me. I think what would be really helpful to kick off would be, could you just give people a summary of what’s actually happening in global markets, what happened last week, and then what’s changed over the weekend as well? That’d be a really good start.
Sure. And yeah, it is strange to think it’s only been a week as well when we were doing this. It feels like longer. What has happened is the war has transmitted its effects through the oil price into the headlines and into capital markets. What the oil price is trying to do is factor in the risks of this conflict turning from a temporary disruption, which is what we may have thought 5 days, 10 days ago, into something that’s a longer duration. Because the longer the oil price stays higher, the greater its effect on growth and that will filter into the equity markets because they’re all about profit growth. And the greater the effects on inflation because of energy prices rising, which will filter into the bond markets.
So both of those are selling off as a result of the oil price moving steadily from, let’s say, a $70 world at the end of February to a $90 world at the end of last week, to above $100 as we come through this week. And what’s happened is the oil price is trying to figure out the duration of this conflict. And as we’ve gone through the week, it’s shifted slightly from it’ll all be over shortly, into actually this could rumble on into the medium term. By which I mean four to six weeks-ish is a current rough guess.
And David, you mentioned that equities and bonds falling together. And you often see in the headlines in moments like this, global markets and bond markets tumble, and then you click through to the article and it says they’ve fallen by 2 or 3%. And so can you give us some realistic perspective on when you say that those are correcting, actually what that means in reality? Is it really concerning? Does this bring back memories of Ukraine, for example? Is this a normal kind of correction?
Okay. Well, there’s quite a lot to unpick there. I mean, you’re right generically that when you see headlines, the headlines are there to grab your attention. And very often, certainly in a market, when they talk about markets and market levels and falls, there’s no context. So the falls are from very high levels for risk assets. January and February this year were pretty good. Markets were pretty strong. And to be honest, if we didn’t have this crisis, we probably would’ve expected a pullback of some kind. So we are falling from very high levels and off the back of a run since about summer last year when returns for portfolios and risk assets have been pretty good. So in that context, it’s very much a normal pullback. There’s nothing abnormal happening. There’s nothing unusual about the movements of asset prices. There’s nothing unusual about the movements in our portfolios across the different risk bands at all.
And so could you maybe perhaps frame that in terms of what’s been happening in Saltus portfolios, both in the short-term and maybe year-to-date as well, so we get a practical idea of client experience.
Okay. Well, I suppose the good news is that year-to-date, all portfolios are still up across all risk bands. That’s to Monday morning, today, as we make this recording. And what’s effectively happened is that the first part of March has given back the good gains we had in February. So there has been an effect, but that’s really like wiping out February’s gains rather than wiping out the year-to-date gains. I think all portfolios will be up between 1 and 3% year-to-date still after the retracement. So that’s the context of where we’re in. And as I said before, nothing unusual has happened in markets, it’s all quite rational, and nothing unusual has happened in portfolios. So everything is behaving as it should be at this point.
That is reassuring. It feels a long way then from where we were with the tariffs sell-off last year, for example, at present.
That’s a very good point because that was much more aggressive sell-off. And also, I mean, you’d mentioned before, but maybe compared to the Ukrainian invasion when we last saw a big rise in the oil price, things are very different. This is where context matters, because back then we had interest rates that were very, very low and they needed to correct very quickly from zero to let’s say 4 or 5%, and that adjustment was hard. And the world economy was still slightly all over the place post COVID.
Whereas if we scroll forward to now, world economy is actually in quite a good place. Profits are pretty good and interest rates are “normal,” such that any adjustment for inflation will not need to be as dramatic as it was back then, despite the fact that you’re getting oil price shocks of a similar scale. So that’s why I think context matters. So from what we know at the moment, it’s so far so normal; it’s not great to live through this, but what we have to get our heads into over the next couple of weeks perhaps, and we do have an asset allocation committee this week as well, but during that and over the next three to four weeks, is to start not only monitoring in case there are any cracks, but also trying to see if we can see any opportunities as a result of these movements.
Okay. And perhaps we can come to some opportunities, but before we do, conscious that we have different solutions in place for different clients, depending on their situation. And so it’s been a very short period of time, but will the experience of clients in more, for example, actively managed multi-asset class portfolios versus our global market passive strategies, for example, will their experiences have been quite different, and do you expect them to be different at all?
Specifically, it’s too early. I mean, five days is genuinely too early to try and peel out those differences. And the other thing to remember is that each crisis has its own characteristics, and so each sell-off has a different impact on a different portfolio. But in general, to answer your question, if it’s an average sell-off for the normal type of reason, then you would expect an actively managed portfolio to do a bit better, well, to do better on the drawdown. That’s because you are paying a little bit more to get a little bit extra diversification. And certainly our experience in the past and our expectation for the future is that on average, quite a lot of times above average, that the actively managed will do better than the more passively managed strategies.
Okay. Thank you. That’s worth remembering. And then, David, the million-dollar question, if you like, I’m going to ask you to get your crystal ball out if possible and predict the future of warfare in 2026, but could you at least touch on a potential outlook? Are you concerned that this is going to cause long-term systemic issues for investment portfolios throughout this year? Do you think this is more a short-term shock? What’s the consensus, and what are we planning to do in portfolios in the context of that?
Well, the central case is it is a shock that will be short- to medium-term. It may have longer-lasting effects and the oil prices stays potentially higher than it otherwise would’ve been, depending on how it pans out, but that should be something that economies and markets can absorb.
And the reasons why this is consensus in the market, and I suppose a good reason why it’s a central case, is that there are physical limits on how long the conflict can go on. Either run out of missiles, or the economic pain from high oil prices for Iran or Iran’s customers, such as China who can bring leverage to bear, or even for the Americans, will incentivise people to get to the table.
Or there may even be such military domination that you can get the oil tankers out of the Gulf again with an acceptable level of risk, in which case the oil price will very quickly start to retreat; may stick higher than it otherwise would’ve been, but it won’t be where it is now because we are in a world that actually has plenty of oil.
So there are good physical reasons why we think, and why consensus seems to think, that this is, let’s say, a conflict that is a period of four to six weeks, that kind of number rather than years in systemic damage. And that’s why we may have to, in markets where you have to recalibrate our expectations about future profit growth or future return potential, but that just means that things would probably tick a little bit lower rather than disappear altogether.
So I think, kind of like we were thinking anyway, long before this crisis came, that we’re going to enter a world where simple and stable strategies would start to come into their own, because we’ve got some big question marks out there over the impact of artificial intelligence and things like that. It’s just a little bit hard to see beyond the next year or so with conviction and understand what you’ve got to pay up for. So just being simple, stable, pretty liquid, and making sure that your diversification is good enough to ride the bump, yet still being nimble and keeping your eyes open for any opportunities. That’s what we were thinking about anyway as an investment committee and we will, I think, continue to think over the weeks ahead. If it changes, we will take action and we will update you.
Okay, that’s really helpful. So certainly no fires to put out, and I’m sure there’s lots for the asset allocation committee to discuss. We’ll do a full write-up, as usual, on the asset allocation committee output for all of our clients, which should come out to you next week as well, which will cover much of what David and I discussed.
Thank you so much for joining us for this video and hopefully we won’t have too many more of these updates for you. But if, as David says, things do change, we will of course be in touch. Thanks very much.
Thank you.