Tankers are seen off the coast of Fujairah, as Iran vows to close the Strait of Hormuz.Amr Alfiky/Reuters
Four days into the U.S. and Israel’s co-ordinated air strikes against Iran, money managers are worried about a messy and sustained regional conflict and considering where to seek safety amid volatile markets.
“There’s a realization that the situation is already escalating to neighbouring countries, and that’s why the market reaction is different than it was on Monday,” says Jonathan Lo, associate portfolio manager at Ninepoint Partners LP in Toronto.
“Initially, the markets were pricing in a quicker resolution, but now with new information we’re seeing more risk-off moves in the equity markets and broad selling across a lot of sectors,” adds Mr. Lo, who co-manages Ninepoint Global Select Fund.
The S&P 500 fell 0.94 per cent on Tuesday, the Nasdaq Composite was down 1 per cent and the S&P/TSX Composite Index closed down 2.4 per cent after closing at a record high on Monday. U.S. gold futures settled 3.5 per cent lower, while Brent crude and U.S. West Texas Intermediate futures were up 4.7 per cent.
With shipping disrupted through the Strait of Hormuz, through which approximately 20 per cent of the world’s oil supply passes, and Qatar halting liquefied natural gas (LNG) production, the energy sector is in the spotlight as a potential harbinger of rising inflation.
It’s also a reminder that the world economy is more varied than the big technology stocks that have been dominating market conversations.
“During the past couple of weeks, the market has been responding to various AI dystopian and doomsday scenarios,” says Sam Mitter, senior portfolio manager at Ninepoint Partners and lead manager of the Ninepoint Global Select Fund with Mr. Lo.
“The past few days are a reminder that the global economy is more than just AI. It’s built on steel and materials. It’s moved by machines. That’s one reason, going into this conflict, we’ve been overweight materials.”
Both portfolio managers say they’re not making any “knee-jerk” reactions.
“We have this saying, ‘We don’t create the wind, but we can adjust our sails,’” Mr. Mitter says. “You see a ground reality, and you position for that. We’re going to be adjusting to every little detail, every nuance.”
The Ninepoint fund remains overweight energy and materials, including gold, copper, uranium and fertilizers.
“Not only are there strong secular demand drivers for those, but in a multi-polar world, they become strategic resources in the midst of a chaotic geopolitical situation,” Mr. Lo says.
Steve Locke, chief investment officer, fixed income and multi-asset strategies, at Mackenzie Investments in Toronto, says he sets up portfolios for the medium to longer term.
“Sure, there are going to be events along the way that are going to create some noise around the positions we have,” he says, but the underlying fundamentals and the “broad macro story” drive performance more than particular events.
In recent quarters, markets in Europe, Australasia and the Far East have been attractive in terms of increasing diversity, he says, “and we don’t see that situation any differently today.”
Should the global price of oil continue to rally, Mr. Locke remains constructive on the Canadian dollar.
“Our global investment committee is overweight the Canadian dollar, the Japanese yen, and the euro versus the U.S. dollar,” he says. “In the wake of this macro event, we like the Canadian dollar just a little bit more.”
For advisors, macro events are a good time to reassess clients’ asset allocation and risk tolerance, Mr. Locke says.
“Advisors need to be rebalancing the risks at all times to include more diversity as the market cycle matures,” he says. “Even as equity markets are rallying or gold is having the ride it had over the past year – those things are great to enjoy, but we don’t want to overstay our welcome.”
Mr. Mitter says this is an opportune time for active managers – and for diversifying globally.
“The U.S. commands more than 50 per cent of the world’s economy. ... But don’t forget about the rest of the world,” he says.