Why are markets so calm?

What has happened this week?

James [00:00:32] Hello, it's Friday, the 20th of June. So what's happened this week? Well, there's been lots of news obviously, particularly when it comes to geopolitics. Conflict between Israel and Iran, and question marks as to whether it will become a deeper conflict in that region or a wider conflict involving other participants, most notably the US, of course. But as of today, it's created a lot of headlines, but it actually hasn't impacted markets that much. In terms of equity markets, they've sort of gyrated a little bit in terms of news flow, but really they've rumbled along and they're down a percentage or so over the last week. Government bond yields haven't moved a huge amount and credit markets also haven't really reflected an increase in risk aversion. 

What has driven this?

So what's caused markets to move in the way that they have? Well, it's quite interesting, perhaps a fairly rational response to the news, which is ultimately obviously terrible from a humanitarian perspective and worrisome from a geopolitical risk perspective, but it's not particularly impactful in terms of the likely path of the global economy, the likely path of businesses and profitability. And so while you can understand that the headlines are very attention grabbing, the market's response has actually been sort of logical. And the small sell-off we have seen is a fraction of the sell-off that we saw around the Liberation Day, the tariff surprises that we saw at the 1st of April. Then this morning, the news was out that the US has given itself two weeks to decide whether to intervene or not, or perhaps more likely really what's happened is they've given Iran two weeks decide whether they intervene or not and we'll see obviously where it goes from here. But so far the impact on markets has been relatively modest. 

What does this mean for investors?

So what is the impact for investments? Well, we've seen some interesting dynamics under the surface, perhaps. Oil, perhaps unsurprisingly, has strengthened over the course of the week. It's up about 10% over the course of week, Brent crude in the 80s. It's not even as high as it was earlier this year though. So although it has gone up, it's not exactly flying up and it's not too high. There are some potential inflationary implications, of course, of the increase in the oil price. And actually, we've had a number of central bank decisions this week already. We had the UK and the US central banks both deciding to do nothing in their latest meetings and both citing, I suppose, the fact that while inflation is under control and looking fairly low today, not far off their targets really in any sort of meaningful sense, but the concern being really that we don't know how the rest of the year is going to pan out. Remember, these tariffs and we still don't even know what the tariffs will end up looking like, but the tariffs are likely to be inflationary, at least in the short term. And so I think the central banks are quite sensibly saying, we'll just sit on our hands and see how this pans out in the next couple of months. Now, that's not to Donald Trump's taste. Again, the president was saying we should be much further ahead in terms of cutting interest rates. In fact, the Swiss National Bank did cut interest rates this week. They went down to zero, which is quite a meaningful move. And it reflects, again, the point we've made repeatedly in these videos that this 'one size fits all' approach to central bank policy and interest rate policy that we were allowed to use in markets between the Financial Crisis and Covid, we're sort of very much in the sort of post 'one size fits all' world when it comes to interest rates today. Being active and having the ability to express differences in terms of where the likely path of interest rates are in these different regions is, we believe, an important portfolio tool to have going forward from here. 

Other things you might expect to have done well with all the geopolitical risk is gold. Gold again has sort of drifted up a little bit, but again has been higher this year. In fact, only a couple of months ago, it was slightly higher. It's actually around its all-time highs, but it's not reflecting a new increase, a material increase in risk aversion over the last couple of weeks. And then finally, the VIX Index, which is what we refer to as the 'Wall Street fear gauge', it's priced off options pricing in the US. And really what it reflects is people's desire to buy portfolio insurance, you can use options as a form of portfolio insurance. And so if people are willing to pay up for it, it implies that they're more worried about prevailing risks out there. VIX has moved up to 22, just to give you some context of what that means. The last 12-month average, if you take the daily level of VIX, has been 19, so there's only a very modest increase from there. And some even more interesting context; risk aversion in that April sell-off when we had the Liberation Day surprise, the VIX Index went up over 50. So it just, again, gives you a feeling for the scale of the risk aversion around that was very materially greater than it has been here. 

What are we doing as a result?

So to conclude really, how does this relate to our asset allocation in our Multi-Asset Funds and portfolios and are we doing anything about it? Ultimately, we're keeping a watching brief in terms of the geopolitical situation around the world currently. We don't see any material changes in fundamentals. We don't see any material changes in outlook that's come from this news flow from this week in particular. And so the best thing to do at the moment is to just sit and see where things go from here. It's a nice opportunity to remind ourselves, of course, of the importance of diversification. Having different assets in your portfolio that will do well at different times or conversely be impacted in different ways by news flows such as this. So having a broad swathe of different asset classes, regional allocations, stylistic allocations, managers, active and passive. And everything else really sort of diversifies away any particular idiosyncratic risk. On top of that, of course, patience and the fortitude to look through news like this and remind yourselves that ultimately as investors in businesses and buyers of debt, you need to assess the value of those assets and their outlook rather than becoming fixated on short term news flow. 

That's it from me. Have a good weekend when you get there, and we'll see you next time.