Conflict in the Middle East

The following notice has been provided for Dentons Wealth by Square Mile Investment Services Limited whose services we use in respect of investment portfolios.

It is with great sadness that we find ourselves writing about more conflict in the world, with last week’s events resulting in many atrocities and no doubt much human suffering, and our thoughts and prayers are with those affected by such dreadful events.

The ongoing hostility has had an impact on financial markets, with investors carefully assessing the potential for a broader conflict involving various nations. It is our hope, as well as the consensus, that the involved parties have limited appetite for further confrontation. Recent discussions amongst nations with key stakes in the region, such as Saudi Arabia, the USA and Iran, may influence the situation in the coming days.

Nonetheless, the immediate future remains uncertain, and it is likely that military escalation will continue. We anticipate that peace talks and negotiations will eventually take place. Any escalation could disrupt various sectors, including oil supplies, affecting global economic growth, and introducing market volatility.

To date, we have observed fluctuations in energy prices, driven by concerns about potential involvement by certain nations. However, as the situation evolves, the initial price gains have receded, and broader markets have remained relatively stable.

The conflict's impact on the oil market is twofold, firstly because a significant portion of the world's oil supply transiting through areas such as the Strait of Hormuz (through which some 20% of the world’s oil supplies are transported*), and so any move by Iran or others to block this shipping route could have significant implications for both supplies and therefore oil prices. Secondly, Iran is a major oil producer with some 4%* of the world’s total. Any disruption to these routes or this supply is therefore a matter of significant concern due to its potential effects on global economic stability.

In the event that the conflict does broaden, it could significantly disrupt the flow of oil, which could have implications for economic growth and financial markets. Central banks may consider further support for their respective economies as necessary, including putting on hold any further monetary tightening.

In anticipation of potential challenges, we have maintained cautious positions in portfolios throughout this year, with an underweight in fixed income, an overweight in absolute return and a neutral weighting in equities. In this delicate macroeconomic environment, we see a compelling case for investment in the funds that invest in equities of quality companies which should help us navigate uncertain times.

In our bond allocations, we have focused on strategic and flexible bond solutions that can adapt to changing market conditions. The fund managers have proactively adjusted portfolios in response to evolving circumstances and have been moving into higher quality issues and those sounder credits in the markets as the environment was already one where higher default rates were expected.

Furthermore, our diversified holdings in the absolute return space are strategically designed to mitigate periods of heightened market volatility and uncertainty. These holdings are intended to provide stability during challenging times.

In summary, we hope for peace and stability but are prepared for evolving conditions and maintain a vigilant stance on unfolding events.

Important Information

Our thoughts expressed in this report relate only to the portfolios we manage or advise on behalf of our clients and as such may not be relevant to portfolios managed by other parties.