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Each week, Roula Khalaf, the FT’s Editor, handpicks her preferred narratives for this publication.
Unlike the presumptuous commentators in various publications, I possess no unique insight into the Iranian government — nor into President Trump’s mind. With the conflict now lasting a month, what lies ahead? I have absolutely no idea.
Nevertheless, given my beard’s hue, reminiscent of a koala’s posterior, I can assure you that financial markets have already factored in every conceivable scenario for the conflict. This encompasses even the most dire possibilities.
Prices also reflect optimistic conclusions. However, we observe fewer investors leaning this way since risk assets have generally been weaker since February 28. They also surged on Monday, following allegedly “highly positive and productive discussions”.
Hence, my perspective is that the risks are asymmetrical. Should the Strait of Hormuz remain congested, equities will experience a smaller decline than they would an increase if the passage were suddenly unblocked.
Furthermore, there have been very few instances of individual investor selling since the hostilities commenced. The habit of buying during downturns persists. Professional investors, meanwhile, have lowered their exposure by utilizing instruments such as exchange-traded funds, rather than divesting shares entirely.
Indeed, ETF activity has skyrocketed to nearly half of all US trades, according to Bloomberg data — an unprecedented level. This has resulted in one of the largest short positions ever recorded in US stocks. Citadel Securities speculates that many of these transactions were executed by rule-based algorithms.
This implies that investors are eager to activate the buy command once more — either directly or through programmed trades. Naturally, if the situation in Iran truly deteriorates, hedges will be removed, and shares will be sold outright. At that point, prices will quickly turn unfavorable.
But what could be more terrible than what is already conceived in people’s darkest imaginings? Troops on the ground? The bombardment of civilian power facilities? Oh, there I go again, falling into the trap of sounding like a military strategist or an engineer.
You understand my point, though. On the other hand, there is such an abundance of negative coverage in the media that surely just a few days of watching television without distant smoke plumes would significantly uplift the general mood.
And numerous positive developments have been overlooked. For instance, if you wish to celebrate like a tech entrepreneur, I suggest watching Jensen Huang’s recent address about OpenClaw. Nvidia’s chief believes “it’s as significant an innovation” as the internet.
Or what about the 13 percent earnings growth Wall Street anticipates for the first quarter, and those American consumers who simply continue their spending spree? Also overshadowed by events in the Middle East were better-than-expected retail sales, industrial output, and investment figures in China.
In addition, Warren Buffett’s successor has recently acquired a stake in the insurer Tokio Marine Holdings, further solidifying his commitment to Japan. And speaking of financial institutions, banks globally are performing exceptionally well. Even more so if interest rates hold steady.
Since I am not an authority on global oil and gas markets (fortunately, my competing writers all are), I dedicated some time this week to reviewing the latest Working Papers from the IMF. A couple of them also provided me with ample material for contemplation.
The mathematical equations triggered dreadful memories of second-year economics, but I believe one paper concluded that increased defense expenditure benefits European economic expansion. The other analyzed how much debt governments can accumulate before economic output decelerates.
The findings, as I interpreted them, indicate more than pessimists fear. At least for high-income nations. It was also astonishing how little “debt overhang thresholds” fluctuate. And why could some nations borrow more than others? A history of repayment is helpful, as is sound governance and possessing a substantial, advanced financial sector.
I absorbed this information with keenness (understand the pun??) as everyone appears to dislike bonds these days. Global yields have surged since the war began. But they were already creeping higher due to concerns that government finances were stretched to their limit.
All of this implies that 10-year UK gilts, for instance, are offering a coupon equivalent to nearly 5 percent. That sounds enticing to me. I can acquire them at a discount to par and, should peace materialize, I stand a good chance of realizing a capital gain. And tax-free, to boot!
My Fidelity cash fund offers the same yield without any prospect of its value appreciating. And let’s face it — Britain ranks quite well on those IMF criteria, even if its politicians are the worst since my arrival in the country 35 years ago.
So, gilts are a worthwhile gamble, I surmise. What else? As I previously stated, earnings multiples have decreased to long-term averages in Asia, emerging markets, and, remarkably, some US stock exchanges too. The same applies to the UK, though not quite so in Japan.
I’m still uncertain about Europe, IMF paper or not. What I do comprehend is that Trump can significantly influence my medium-term performance. A few impromptu tweets and stocks are suddenly 5 percent up or down — almost a year’s worth of returns if I’m fortunate.
Is there a method to enhance my chances of dollar-cost averaging instead of being severely impacted? My former associates at Deutsche Bank have conceived a “pressure index” to gauge the financial pressure the president faces to yield.
Needless to say, it was extremely high seven days ago. The dilemma, however, is that when stocks, bonds, and his approval ratings climb, the pressure on Trump to adopt a conciliatory stance diminishes. And vice versa.
Like a perfectly balanced seesaw. Consequently, short of being Donald — or sharing his surname — the rest of us have minimal hope of accurately timing the market.
The author is a former portfolio manager. Email: [email protected]