Our positioning: Oil shock rips markets out of hibernation

Those who had hoped for a calmer March after the turbulent start to the year were left disappointed. The US government is keeping the world and the financial markets guessing. The threatened annexation of Greenland, a military intervention in Venezuela, repeated attacks on the independence of the US Federal Reserve and tariffs recently declared as illegal were followed in early March by the coordinated US and Israeli military strike on Iran. While the financial markets had reacted to previous geopolitical tensions with remarkable composure, the response to the outbreak of war was considerably more severe. The oil price in particular rose sharply and briefly exceeded the mark of 100 US dollars a barrel, which is double the price at the start of the year.

Stocks and bonds under pressure

Those markets that need a stable supply of Middle Eastern oil soon revealed their vulnerability. European shares and emerging market equities came under particularly heavy pressure, losing around 8 percent since the start of the conflict. The US stock market proved less directly affected and has fared better so far. However, it has been moving sideways for several months. Nonetheless, the more broadly diversified global value stocks remain among the best positioned over the year, and we’re continuing to overweight them.

Besides the equity markets, recent events have not spared bond markets, albeit in a rather unusual way. Unlike in typical crisis situations, when these are sought after as a safe asset class and gain in value, interest rates have risen this time around. Inflation concerns related to rising energy prices were a particular contributory factor. In the US, government bond yields increased not only nominally, but also in real terms. Given the weaker growth outlook, this is an unusual signal that may indicate initial doubts about confidence in US fiscal policy.

Selective in emerging markets

In terms of emerging market equities, despite the correction, our fundamental assessment is largely unchanged. Overall, the economic situation in these economies remains more solid than in the industrial nations and valuations still seem more attractive to us, especially compared to the US, whose stock market valuation remains high. We’re maintaining our slight overweight position in this asset class. However, we have a different view of emerging market bonds. In conditions where the impact of higher oil prices and the duration of the conflict remain difficult to assess, we’re scaling back our overweight and holding the freed-up funds in cash. The key factor here is that emerging market bonds have historically only provided limited crisis protection during times of significant equity market losses.

Gold remains the year’s strongest asset class.

Gold also only held its ground as a safe haven to a limited extent last month, losing 5 percent since the outbreak of the war. In particular, the rise in interest rates and the US dollar’s slight strengthening have created headwinds. That said, gold remains the highest-yielding asset class this year by some margin, generating annual returns of over 15 percent in Swiss francs. We’re maintaining our overweight position. Demand for precious metals looks set to remain strong in an environment of geopolitical uncertainty, rising inflation and growing doubts about America’s role in the world.

Performance of asset classes

Our positioning – Swiss focus