With the Strait of Hormuz closed, more expensive oil is likely filter through to other products and raise prices.Stringer/Reuters
More than six weeks into the Middle East war, the picture for clients is hardly any clearer, with markets swinging daily but back to record highs while worries about inflation persist.
As Shirley Won reported this week, energy fund managers are bullish even if the war ends soon, given the damage to infrastructure and concerns that shipping in the Strait of Hormuz – through which about one-fifth of global oil passes – won’t resume in a predictable, pre-war fashion.
A TD Economics report published this week says the new base-case scenario is for the U.S. naval blockade of the Strait to persist until a deal to end the conflict is reached in early May. Full traffic will return gradually, and West Texas Intermediate will trade at around US$85-US$95 a barrel through September before dropping to around US$80 by the end of the year.
Under TD Economics’ “prolonged disruption” scenario, the two-week ceasefire collapses, strategic reserves are exhausted and oil prices hit US$130 a barrel before coming down to around US$90 by year-end.
But guessing how and when the conflict will end is difficult, even if U.S. President Donald Trump appears intent on declaring victory, and more expensive oil is likely to filter through to other products and raise prices.
A report from Desjardins says an energy price shock is likely to weigh on clients, particularly higher-income ones who travel and eat out more and are therefore most affected by higher transportation costs.
The federal government’s increase in the GST/HST credit, planned before the Iran conflict, should offset higher energy costs for lower- and middle-income clients, it said.
Meanwhile, a report from Royal Bank of Canada says a repeat of the widespread inflation experienced in 2022 following Russia’s invasion of Ukraine is unlikely because supply chains are in better shape and the Canadian economy is softer.
Against this backdrop, market outlooks for the second quarter are coming in.
“Even if the Middle East conflict is resolved quickly, the economic and market consequences will likely persist,” according to BMO Global Asset Management’s Q2 portfolio strategy report.
The authors are increasing commodity exposure as a hedge against supply shocks and favouring quality and low-volatility equities – especially companies with strong balance sheets and cash flows.
“Despite the challenging backdrop, the underlying fundamentals remain sound enough to maintain a neutral/slightly overweight broad equity position for now,” the report says.
RBC Global Asset Management has increased its overweight exposure in Canadian, European, Japanese and emerging-market equities and has further underweighted U.S. stocks.
“Assuming continued economic growth and a near-term de-escalation to the Iran war, we expect non-U.S. equities to outperform,” says the asset manager’s spring outlook report, released last month.
Other strategists are ready to take gains on energy stocks. David Sekera, Morningstar Inc.’s chief U.S. market strategist, recommended investors overweight the energy sector last year, when it was undervalued and would act as a hedge against inflation or geopolitical issues.
The sector has risen by more than 30 per cent thus far this year, so it may be time to harvest some of those profits, he wrote in a Q2 outlook report entitled, “Don’t Panic, Readjust.”
But there’s very little sign of panic in markets, with major indexes back at or close to all-time highs. Globe columnist Tim Shufelt wrote this week that investors may have lost their capacity for panic, which carries its own risks.
So, what are advisors doing? As in most crises, encouraging clients to see through the noise and trust their portfolios and long-term plans.
And there are plenty of other topics to focus on. To name a few: a wealth transfer that also includes a lot of stuff, avoiding retirement income tax traps at this critical time of year, and helping clients claim vehicle expenses without triggering an audit. Read more below.
Must reads
Tax traps: It’s a big change when clients shift from accumulating wealth while working to unwinding savings for use in retirement. And while there’s no standard playbook, given the different income sources clients can have, there are common retirement income tax traps to avoid.
Great stuff transfer: Underneath the great wealth transfer, a quieter transition is unfolding: a lot of stuff is changing hands. As Sascha Isaacs from Richardson Wealth Ltd. writes, collectibles are illiquid, difficult to value, hard to sell and they often carry significant emotional meaning and personal history. Here’s what advisors can do to make such estates more manageable.
Extra time: Wealth management industry groups are calling on the federal government to give investment fund companies, dealers and independent advisors more time to implement changes to GST on mutual fund trailing commissions. They say the industry will be challenged to have systems in place to charge and remit GST by the Canada Revenue Agency’s July 1 implementation date, although some are already taking steps.
More from The Globe
Tax shelter: The first home savings account, or FHSA, mostly helps those with higher incomes and family financial support, according to a new study.
REIT for sale: Choice Properties REIT and KingSett Capital, a private real estate firm, are teaming up to buy First Capital REIT for $5.2-billion. Based in Toronto, First Capital’s retail-focused real estate portfolio is largely made up of open-air shopping centres in major cities.
Growth downgrade: The International Monetary Fund has downgraded its outlook for the global economy as conflict in the Middle East has upended energy markets and compounded geopolitical uncertainty.