To say a lot can change in a week feels like an understatement. The outbreak of war in the Middle East just eight days ago has left the world reeling. Global oil supplies and trade flows are disrupted, aviation routes are in chaos and stock markets around the world face turbulence – there’s a lot for investors to make sense of.
So what should they do? It’s easy enough to say that those investing for the long term shouldn’t worry, that they should wait it out and see what happens.
And, for most, sticking with their strategy and not getting distracted is probably the best course.
But it’s not always that simple. Financial experts suggest there are strategies that can help investors weather the storm. And for the bold, there may even be very selective buying opportunities.
As fighting in the Middle East continues, what does it mean for your investments? And how can you protect your portfolio?
What’s happened in the markets so far?
Market swings have been substantial as investors take in the news. Around £150billion has been wiped off the FTSE 100, which is down close to six per cent since the conflict started.
As fighting in the Middle East continues, what does it mean for your investments? And how can you protect your portfolio?
The oil price surged, reaching more than $92 per barrel on Friday. Prices are elevated as investors are nervous about the prospect of disrupted oil supply and energy shortages.
Airlines and travel stocks were the biggest fallers as the conflict sparked travel chaos and left hundreds of thousands of travellers stranded. IAG, the owner of British Airways, and EasyJet were among the worst affected.
Investors typically flock to gold during times of geopolitical uncertainty. The price of the precious metal rose to $5,419 per ounce on Monday, close to a record high, but has since fallen back to $5,147.
What is expected to happen next?
While stock markets and some asset prices are extremely volatile, most UK investors with balanced portfolios are unlikely to have seen huge drops so far.
Whether things deteriorate more will hinge on how long the war lasts – and, most crucially, the impact it has on the price of oil.
Even if you don’t hold oil stocks in your portfolio, you will be affected in a multitude of ways.
Nathan Sweeney, the Marlborough Group’s chief investment officer, says: ‘When you have higher energy costs, it pushes up inflation. When inflation is higher it acts as a drag on growth, because if the oil price is higher it becomes more expensive for people to drive. It also becomes more costly to transport and make goods.’
An uptick in inflation means interest rates stay higher for longer, which can act as another brake on economic growth.
Analysts at Barclays estimate that a $10 increase in the oil price can lower economic growth by 0.2 per cent.
While these estimates are concerning, there is no clear evidence at the moment that the health of the global economy will be materially affected by this war.
Sweeney forecasts that events in the Middle East may spark a stock market ‘correction’ – a fall of ten per cent to 20 per cent. However, he does not expect to see a bear market or recession, where the market drops 20 per cent plus.
He says: ‘The oil price at the beginning of the year was $60, and today we are at $84. There hasn’t been a material enough jump in the oil price to increase inflation and the likelihood of a recession.
‘You would need to see the oil price between $120 to $150 for a sustained period for markets to actually be concerned.’
Lindsay James, investment strategist at wealth management firm Quilter, says: ‘We are probably going through a spike rather than a long-term increase in the oil price’
Lindsay James, investment strategist at wealth management firm Quilter, agrees: ‘We are probably going through a spike rather than a long-term increase in the oil price.’ She points out that there is substantial supply relative to demand, supported by renewable energy supply. ‘This suggests that global growth isn’t about to see a sharp downturn,’ she adds.
What should investors do?
If the events of last week have shown investors anything, it is the value of a well-diversified portfolio – in other words, not having all of your eggs in one basket.
This means holding a mix of stocks from different sectors and geographies, ranging from technology, banks, energy, consumer goods and industrials.
For example, investors holding airlines in their portfolio would have seen their values drop, while holdings in oil and gas companies would have risen, limiting the overall losses.
David Coombs, head of multi-asset investments at Rathbones, says: ‘I always hold oil stocks because over the 30-plus years I have worked in fund management we have had many oil price shocks. You never know when they are going to come, but you can be fairly certain they will.’
David Coombs, head of multi-asset investments at Rathbones, says: ‘I always hold oil stocks because we have had many oil price shocks’
Sweeney adds: ‘The key message is not to panic. Diversified portfolios are designed to absorb shocks like we are seeing at the moment.’
It is always worth reviewing your holdings to ensure they are sufficiently diversified to withstand a market fall.
Most DIY investment platforms now offer tools that can help you to do this. If you log on to your account, you should be able to see the mix of assets that you hold.
However, don’t act rashly if you’re not happy with your mix. Decisions made in a hot state rarely yield good outcomes.
Does it still pay to invest in gold?
Gold can offer great diversification in a portfolio as it often rises in value when other assets are falling. It’s no wonder that investors continued to buy and drive the price up last week. However, with the gold price up 140 per cent over the past two years, can investors justify buying the precious metal today?
James points out that the valuation of gold is linked to underlying demand, which remains strong. This is because banks across the globe continue to buy gold in order to diversify their reserves away from US dollars and US government bonds. She doesn’t see this changing any time soon.
‘I don’t think it is mad to buy at this level,’ she adds.
Sweeney also points out that if inflation rises, holding gold could become more popular because it can act as a store of value to protect against rising prices.
Why the bond market is in for a bumpy ride
There was a bond market sell-off last week as investors took fright at the prospect of a rise in inflation caused by a jump in the oil price.
Inflation is bad news for bonds because it erodes the fixed income they pay out. The yield on the UK’s ten-year gilts – a key measure of Government borrowing costs – soared to 4.73 per cent on Friday, up from 4.23 per cent at the end of the previous week – with UK yields rising more sharply than any other European nation.
Bonds still have a role to play in portfolios, but investors must be braced for a potentially bumpy ride. Coombs is particularly cautious on gilts – UK Government bonds. He notes that if the oil price remains elevated, it would cause inflation to rise as the UK is a net importer of energy.
‘If sterling were to continue to weaken against the dollar, that is inflationary for the UK. That is not great news for bond markets. It’s also not great news for the Government in terms of the fiscal deficit. It probably means we won’t get any reductions in interest rates in the UK,’ he explains.
Just before war broke out, traders predicted an 80 per cent probability that the Bank of England would cut interest rates on March 19. By Wednesday, the probability had been cut to 30 per cent.
James suggests focusing on parts of the market that are less sensitive to inflation and interest rate rises. For example, index-linked bonds are designed to protect investors against inflation. Short-dated government bonds typically mature in just one to five years, so the income they offer is more predictable and safer than longer-dated versions.
What you can do to protect your savings
Aside from diversifying portfolios, what else can investors do to protect their savings pots from market shocks?
The war is creating turbulence in stock markets and this will create selective buying opportunities for investors who are adventurous or brave
It may feel counter-intuitive, but sometimes the best thing is to do nothing. Try to avoid making knee-jerk reactions as these can result in losses being locked in.
James notes that if you are investing in the stock market, you should have a minimum timeframe of at least five years.
‘As we have seen with the pandemic and the war in Ukraine, you get these sharp market downturns and it is very easy to be panicked out of your positions. But markets generally reverse,’ she explains.
Coombs agrees: ‘What do I try to do as a professional investor during these periods? I get caught up in all this just as much as everybody else. Of course – I’m a human being. I wake up at four o’clock in the morning worrying about the portfolio and question if I am doing the right thing.
‘There is a risk of feeling you have to do something, but then I remember my process and my plan. That stops me from overreacting and destroying value, which is unfortunately what many people do. They start to liquidate when markets are falling.’
It may take a lot of willpower, but try to avoid checking your portfolio as often as you check the news, James advises.
Feel the fear and invest anyway
The best time to buy is often when fear is at its peak, even though it feels scary or unnatural.
The war is creating turbulence in stock markets and this will create selective buying opportunities for investors who are adventurous or brave.
When markets are calm, Coombs says it makes sense to put together a wish list of investments you would like to add to your portfolio and to have an idea of an entry price that looks attractive. This could be for a stock, bond, investment trust or a fund.
Strange things can happen in markets during a war or crisis. Under pressure, some professional investors will sell their winners or cover their losses as early as possible, which creates anomalies in share prices. So it makes sense to keep some of your portfolio in cash so you are able to move quickly if you do spot a bargain.
‘You get these outsized moves that don’t look quite right, and it allows you to pick up things at valuations that weren’t there a week ago,’ says Coombs. ‘That is what happens during an event like this where you get lots of technical things happening in the market, which means prices don’t necessarily move in line with their true intrinsic valuation.’
Coombs’ team has taken advantage of market volatility to buy into stocks that were on their radar. They include HSBC, US copper miner Freeport-McMoRan and Siemens Energy, which all saw their shares plunge last week.
‘A lot of defence stocks have moved over the past two years,’ says Coombs. ‘They are not cheap, so you are in danger of being late to that particular trend’
In the case of Freeport-McMoRan, Coombs noted that rising commodity prices are a big contributor to inflation, so in theory the copper miner should provide some inflation protection in the portfolio. Meanwhile, he was attracted to HSBC’s large presence in Asia.
Russ Mould, an investment director at AJ Bell, highlights gold miners as one sector that could look attractive if the gold price stays above $5,000 per ounce.
‘Getting gold out of the ground is not easy and it is expensive, but gold miners do look cheap relative to the gold price,’ he explains.
He highlights Fresnillo as one to watch, following an 18 per cent share price fall in spite of reporting a big jump in profits.
Investing in defence may not be best move
Defence is one sector that will receive a boost from the ongoing conflict. However, experts are divided on whether investors can justify buying in at current levels, given how far share prices have run over the past two years.
‘It is a sector that has done well, but I think it is likely to see more support,’ says Sweeney.
In his opinion, the war will give politicians around the world an easier route to increase defence spending. He suspects this will be the case across Europe and the Middle East, providing support for these stocks.
‘There is a lot of military equipment being used at the moment. All of that will need to be replaced and upgraded. Governments will be spending on new technology as well,’ Sweeney says.
He highlights Rheinmetall and BAE Systems as stocks to watch.
For investors who are comfortable investing in defence companies and already hold them in portfolios, they will have provided some protection over the past week from the broader market fall.
While these stocks can help to diversify portfolios, Coombs does not see a case for investing today.
‘A lot of defence stocks have moved over the past two years. They are not cheap, so you are in danger of being late to that particular trend. It is a pretty crowded trade already,’ he says.
Instead, his team has been looking at suppliers to the defence companies. For example, prior to the conflict they bought Motorola.
The fund manager does not expect defence spending to be higher as a result of the conflict, but notes that it will likely come through sooner.