Transcript
This podcast is for professional investors only.
Erika van der Merwe (EM): US and Israeli strikes on Iran have triggered rapid escalation in the Middle East, adding fresh uncertainty to energy supplies and global risk sentiment. In this special podcast episode, we examine the latest developments and discuss what they could mean for investor portfolios. I'm joined by Colin Graham. He's Head of Investment Solutions at Robeco. Welcome.
Colin Graham (CG): Hi, Erika. How are you doing?
EM: Colin, if we could begin with you summarizing the main developments in Iran and the broader Middle East and how they differ from previous tensions in terms of scale and potential market implications.
CG: Well, I think the conflict has now moved from this shadow war to a broad, multi-day military operation war. So it has come out of the shadows and it's all front and center in terms of the headlines. And we've seen that there's been specific targets in Iran that have been hit. And, you know, this is the US and the Israeli administration trying to achieve their goals in terms of making sure that Iran does not reach nuclear power status -- nuclear weapons status.
EM: So is that really at the heart of what's going on here?
CG: I think so, because you can look at there's other regimes around the world where there is an action being taken and Iran is not a nuclear weapons power as yet. And we can see that this is something that both the Israelis and the American administration want to avoid.
EM: Now, looking directly at the investor implications of what's going on here, you have a multi-asset perspective. What are the primary channels through which these events could shape portfolios, and does it essentially pivot around energy prices, inflation expectations, and implications for risk sentiment?
CG: I think risk sentiment will be the initial move-in markets. So everybody puts a risk premium in because nobody knows. And anybody who says they know they're not telling the truth because we don't. And the main pinch point is around the Strait of Hormuz in terms of how much oil is going to get out and how much is going to be blockaded by the various factions around there trying to blockade there. Or it might be they don't. We don't know as yet.
EM: We've seen the immediate reaction in oil prices so often the barometer for tensions in the Middle East. What are the various scenarios that could play out and therefore with the implied different outcomes for oil markets and subsequent markets?
CG: I think it really depends how long the military intervention continues. And if it's a couple of days, then we expect the profile of the oil price to follow what we've seen in previous times, where we've seen missile strikes and air strikes in the Middle East. And so the oil price will start to come down again, because nothing has fundamentally changed in terms of the supply of oil around the world. Now we saw OPEC+ say that they're going to increase their quotas, but this is a small fraction of the oil that could be lost coming out of Iran. And also, if you think about the US and the US as the engine of growth, is, the US administration has been very clear in terms of trying to make sure that they have enough oil. So they are an oil exporter. They've also taken action in South America to control the supply lines from South America. So from their perspective, I am not sure they're worried too much about the spike in the oil price that were lost. And therefore, do we think this is going to derail the US economy as it stands today? No.
EM: And of course, there's a really strong political imperative in the Trump administration to keep things under control.
CG: Absolutely. So they do not want to commit boots on the ground because that was one of Donald Trump's election pledges. So we'll see how long the aerial bombardment lasts. We’ve seen the retaliation from Iran. And if from my perspective, if that is what they are going -- that's maximum force they retaliate with -- then this is not going to last very long.
EM: Right. And beyond that, also not wanting the inflationary implications for a domestic market for a voter in the US.
CG: Yes, we know the midterms are coming up. We can see this as a good distraction tactics by the administration to get away from domestic issues. And one of the indicators we watch is obviously the gasoline price because that affects every US consumer and is a very obvious sign of inflation.
EM: There have been as a result, safe haven flows into assets like gold, treasuries and the US dollar. Are there other defensive assets that we might be missing or that that could move as a result?
CG: Well, the one that we scratched our heads about is the Yen. You know, that should be a safe haven, has been in the past, but has really not acted like a safe haven over the last 4 or 5 years. So that would be one. The Swiss franc is obviously a safe haven that you can look at as well, but in a risk off environment then I'm not even sure gold will save you, because there are too many financial players. And we've written a couple of pieces on this, over the last 4 or 5 months. And the thing about gold now is that central banks used to be the biggest buyers of gold and holders of gold. Now it's financial interest is the biggest buyer and the biggest holder of gold as an asset. And so sentiment changes then it's not about the fundamental safety of gold. It's about what investors are trying to do in their portfolios.
EM: And then looking beyond these safe haven assets. If you look at equities and at credit, what movements are we seeing? Have we seen, especially in sectors or regions that have an exposure to events in the Middle East to supply chains, travel even? And, you know, given what you have now said, presumably you see only short term consequences?
CG: Yeah. And if you think of safe haven assets, then you're going to be starting to look at some of the magnificent seven again. Because what happens in the Middle East doesn't affect the software buying that you're going to make.
EM: Right.
CG: So from that perspective, it's also difficult to disaggregate where the risk premium is coming from, because we'd already seen credit spreads start to move out towards the end of February. So they're much higher at the end of February than they were at the beginning.
EM: Mhm.
CG: There is some stresses there, especially around the fundings for software names. So that had already happened. You know, we already saw the US Treasury below 4%, ten year Treasury below 4% on Friday anyway. So you were already seeing some safe haven flows, concerns about software AI creeping into the market. So it's difficult to say ,”oh, this is just Iran risk premium versus what's going on in terms of the software sector and the private debt sector in the US.”
EM: And then from a multi-asset perspective, yours, what tactical adjustments, if any, would you consider in response to these risks? And even if they were to escalate and also to phrase it very clearly, this would not be investment advice.
CG: So in our portfolios were long equities, underweight high yield, long commodities. And we're short dollar versus the euro and the Aussie dollar. So one thing that has surprised us is the Aussie dollar has held up pretty well. That's usually a risk-off asset. It gets hurt when risk sentiment turns negative. So if we look at our portfolios, do we want to close the underweight to dollars? Probably not, because our longer term view is that the dollar is on a weakening path. So we'd probably be looking to add to the short dollar in dollar strength commodities. I'm a bit more concerned about and I'd be looking to take profits, especially in the oil centered commodities part. So the gold and the industrial metals we have in portfolios is fine. But the broader sort of B.Com or GSI index ETFs – and those are the ones we'd sell because that sells a lot of our oil exposure. And in equities we have to assess whether the US economy is going to derail or not because of this regional conflict. So escalation would cause us more concern. But at the moment we go back to the fundamentals of the US economy and a lower ten year yield is probably a good thing. It gives room for rates to be cut and earnings have been fine. So what is there not to like about US equities? Apart from the valuations of course.
EM: [Laughs] Right.
CG: But we know as we've talked about in these podcasts that valuations are not driving markets right now.
EM: So to wrap it all up, looking ahead over the coming months, what key indicators or developments will you be watching closely? You know, being ready to adjust tactically or even structurally.
CG: So I think it's about the flow of oil on there. And then you'd have to worry about Europe. You know, we're reasonably constructive on Europe. And our one year outlook was non consensus on Europe's going to have a better year this year. You have to be worried about Japan because they're obviously an energy import. So two of the outstanding equity markets this year would be hit. And then you have to worry about China as well because obviously they're a big energy importer. And if you think about where they've also been getting their oil, Venezuela, that is now off the table. So if you think about China, they're probably in an even more sticky position, gooey position, than those other countries because their supply of oil is probably the most under threat.
EM: Great and helpful insights, Colin, thanks for joining us.
CG: Thank you Erika.
EM: That was Colin Graham from Robeco’s Investment Solutions team, offering clear insights on the market implications of the latest Middle East developments. Thanks for joining the special update available on all major podcast platforms and on the Robeco website. Stay tuned for our regular monthly episode. Until next time.
Thanks for joining this Robeco podcast. Please tune in next time as well. Important information. This is marketing material intended for professional investors. Capital at risk. The podcast was brought to you by Robeco Institutional Asset Management, a Dutch investment management firm located in Rotterdam, the Netherlands. Robeco Institutional Asset Management B.V. has a license as manager of UCITS and EFS for the Netherlands Authority for the Financial Markets in Amsterdam. In the US, this is brought to you by Robeco Institutional Asset Management, US, Inc., an investment advisor registered with the US Securities and Exchange Commission.
