Dear investors,
In January, I shared with you my optimism regarding our long-term investment prospects. Suddenly, what a setback! The Iranian crisis has abruptly clouded the outlook. Oil prices have nearly doubled and the Strait of Hormuz is largely blocked. Escalation risks are growing, both for Middle Eastern instability and a slowdown of the global economy.
And yet, despite the catastrophic narrative nursed by the media, equity and bond markets have kept their cool. Is it complacency or is the crisis less destabilising than headlines suggest?
For our part, it seems imperative to maintain a measured optimism, primarily for the following reasons:
During his second term, Donald Trump has demonstrated a predilection for last-minute retreats. Whether in terms of tariffs, intervention in Venezuela, or now Iran, he seems to have great difficulty seeing his initiatives through to completion. But is this so regrettable? In reality, he behaves like a businessman who instinctively senses how far he can push his bluff. The issue with this conflict is that Iran’s leaders are not receptive to the pronouncements of a lifelong poker player. Undeniably, this complicates the establishment of negotiations to resolve the crisis. But ultimately, reason should prevail within the not-too-distant future, given the high cost of prolonging this conflict for all parties involved.
The overriding threat to market resilience is not necessarily the most widely discussed. In our view, a radical shift in central bank rate expectations could pose a major risk to overall economic activity and market valuations. Only three months ago, the Fed was expected to deliver three rate cuts this year. Today, none are expected. As for the ECB, expectations have shifted from stability or even a slight decline in policy rates, to three hikes. Is this reversal in expectations justified? Certainly, the significant rise in oil and gas prices is reigniting inflationary pressures. This could indeed become concerning if the conflict persists and generates so-called “second-round” effects. But this overlooks the fact that a lasting doubling in energy prices would inevitably lead to a marked slowdown in growth through its dual impact on consumers’ disposable income and corporate margins. Accordingly, it is reasonable to expect that Mr Trichet’s disciples will be sidelined.
As investors, we must never forget that disorder does not destroy value over the long term, it redistributes it. Some assets become riskier, others become indispensable. This is clearly the case with the strengthening outlook of green energy, and the imperative for Europe and Gulf countries alike to reinforce their defence capabilities - an imperative that also extends to goods involved in our food supply and industrial foundations. These are promising themes that will guide the construction of our portfolios in the months ahead, accompanying our core holdings in those technology companies contributing to the powerful and still underestimated rise of augmented intelligence.
As portfolio managers, we will, more than ever, continue focusing not on avoiding chaos, but rather on identifying opportunities.
Best regards,