The value of… doing nothing

On Sunday, watching the events unfolding in the Middle East, I exchanged messages with colleagues about what the escalating conflict could mean for markets.

Thinking about money in the midst of a humanitarian crisis can feel morally unpalatable and ethically unimportant. But it was clear that the blows being exchanged in Iran and the surrounding region would impact our clients’ savings and investments.

Middle Eastern markets – many of which trade on a Sunday – the futures indexes, and recent history gave an indication that while the oil price was likely to soar, and the gold price probably to increase, equity and bond market movements would be more muted.

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Emma Wall

Chief Investment Strategist

This expectation has broadly played out – albeit with significant intraday volatility thrown in. The Vix index, which measures market volatility, hit 28 earlier this week. Above 24 is when markets feel really “spicey”.

Zoom out a little from the daily fear and it is worth reminding ourselves that the US stock market is not far off all-time highs. The FTSE 100 paints a similar picture – up 20%* over the past year, and the MSCI All Countries World Index – a global index of developed and emerging markets – is up near 21%. Past performance is of course no guarantee of future returns but serves as a reminder of the importance of focusing on the long term.

This article isn’t personal advice. Remember, investments rise and fall in value, so you could get back less than you invest. If you’re not sure if an investment’s right for you, ask for financial advice.

Under the bonnet

This aggregate stocks and bonds view obviously hides some major moves. Airlines, energy and defence stocks have seen dramatic changes in value in the past week. Even assets that are usually lower-risk and lower volatility have moved around – the 10-year gilt yield had undulated through the week moving up to 20 basis points in a day.

Regional performance has differed too. South Korea’s stock market fell sharply in just two days. The FTSE 100 jumped mid-week, ending Wednesday in the green, before falling again.

Ultimately, these price discrepancies have been based on a few factors.

• How sensitive is a sector or geography to higher oil prices? Is that a positive or a negative for input costs, revenue and demand?

• How sensitive to higher interest rates is the sector or asset class? If oil prices remain elevated this could have an impact on inflation, which in turn will influence central bank interest rate policy

• How impacted is the sector by the conflict itself? Is a company’s products or services required for warfare? Or does war mean a pause or disruption to its operations in the Middle East?

• How sensitive to a stronger US dollar is a sector or geography? After a multi-year decline, the war has seen the US dollar rally over the past week which impacts businesses that have global trade or currency risk

Of course, all the above hinges on how long the war itself lasts. While it is impossible to know with exact clarity, our base case is that while devastating for those living in or associated with the region, the disruption to global oil and gas supply is transitory and so too will the impact be on wider asset classes.

A prolonged bear market, accompanied by global recession, is an outside risk, but not the most likely scenario. The US military is a global strength, and the President has made it clear restoring global energy supply is a priority.

While conflict continues and energy ecosystems remain impacted, downward pressure on stocks is likely to continue, and central banks are unlikely to cut interest rates. Once a resolution is secured however, we expect markets to return to cautious optimism – with the volatility we have come to anticipate as the norm under a Trump presidency.

How should investors react?

If you have not taken time to align your portfolio with your goals, volatility will hurt more. If you have significant sector biases, shocks will have a greater impact on your returns.

But for most investors, building long-term wealth with a well-diversified portfolio, the best thing to do is actually… nothing. Trying to time the market, analyse foreign policy to gain an edge, or bet on war is something even the professionals get wrong.

Portfolios with exposure to different asset classes, geographies and styles will be most robust against uncertainty. A long-term investment horizon means that days, weeks, even months of volatility and underperformance matter less to achieving your goals. If you have regular savings set up to drip feed into volatile markets without the emotion of proactive trading, even better.

If you are looking for new ideas for your Stocks and Shares ISA or Self-Invested Personal Pension (SIPP) before the end of the tax year, our expert analysts are on hand to provide ideas and guidance. But remember to make these decisions based on your long-term needs not just the current market conditions.

And if all that is too overwhelming right now, parking cash in your tax wrappers means you don’t lose the allowance but have dry powder for when you are ready to act. Just don’t leave it too long – after all, the do-nothing investment philosophy only works if you are actually invested.