Recent events in the Middle East and your portfolio

Pressure had been building on Iran for a number of months with President Trump vocal about the possibility of action. In February a US – Israeli strike was met with retaliation by Iran and hopes by the US of a swift resolution have, at the time of writing, not been met.

The global significance of oil and energy has led to certain sectors being negatively affected by these developments – with airlines and food producers seeing falls in their values. At the same time other sectors will have benefited, with energy and defence companies seeing gains.

Largely most of the major stockmarkets have been impacted by the turmoil in a similar way with sharp falls in the early stages of the conflict with some recovery in the last few weeks with moves towards a peace deal.

The increase in energy costs has also seen a sharp increase in the expectation of inflation through this year. Earlier in the year markets had been expecting several interest rate cuts by major central banks such as the US Federal Reserve and the Bank of England in 2026. This has now reversed with interest rates on hold and there is a chance of rising interest rates in the future.

Bond markets struggled into the end of the quarter as inflation and interest rate expectations reset sharply higher. As  we concentrate on high quality bonds and shorter duration bonds, this helps to minimise the effect of rising interest rates and these investments have held up well and supported portfolio valuations.

As we have often reported, investment returns are a function of taking risk and in your discussions with your Old Mill financial planner, they will have talked about your tolerance for risk and need to take risk to ensure your portfolio is structured to secure the returns necessary to support your financial plans.

Those that are prepared to take more risk for the potential of higher returns will inevitably have experienced a bumpier ride recently, but when we look at the last year, portfolio returns still remain positive as you will see in the Investment Performance Report.

There remains huge uncertainty around how the conflict in the Middle East will develop, however what we do know is that a well‑structured, globally diversified portfolio is designed to cope with periods of uncertainty such as we are witnessing at the moment.  In times of market volatility, the defensive assets in your portfolio will be performing their key role of protecting portfolio valuations.

Markets absorb new information quickly, meaning today’s prices already reflect the best collective view of the future. Trusting that process – rather than reacting to short‑term noise  has served long‑term investors well for decades.

The current situation emphasies the need for diversification – across asset classes, countries and sectors as change is priced in by the market. Over the last few years, you have experienced several periods similar to this – through Covid, the invasion of Ukraine and more latterly, President Trump’s ‘liberation day’ last year. Diversification reduces reliance on any single market or risk factor and helps cushion the impact of sudden events.

Stay diversified, stay disciplined, and remain focused on long-term goals.