2020 has just started and already geopolitics is front and centre. The conflict between the US and Iran has escalated after the recent elimination of the top Iranian military master mind. Iran has vowed to retaliate, upon which president Trump has promised to strike back if Iran would carry through its menace. So far, the response from Iran’s allies – Russia and China – has been fairly muted but it remains one to watch.
The impact on markets has been fairly classic with falling equity markets, higher oil prices, and better performance from safe-haven assets such as gold and the Japanese yen. But what is really at stake?
We do not recommend making changes ahead of events where the outcome is highly uncertain. Instead we maintain a holistic approach by keeping our client portfolios diversified. In our current asset allocation, we are neutral on equities and thus do not carry excessive amounts of risk. In fixed income, while our government bond exposure remains low, we increased it in the fourth quarter by adding to U.S. Treasuries. We also maintain our positive view on the Yen as a safe-haven asset. Moreover, gold remains a strong conviction and has been well represented in portfolios in the last 12 months. In fact, we believe that with bond yield levels already very low, gold might increasingly become the defensive play of choice in investors’ portfolios. While inflation might rise on the back of higher energy prices, central banks look to be in no hurry to hike interest rates. Gold should remain well supported.
Therefore we will keep a close eye on the situation in the Middle-East, and our current asset allocation will remain unchanged.
Brown Shipley Investment Office
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