Investment Viewpoint: Positioned for resilience in uncertain markets

Simplify the complex with clear and concise market insights direct from our investment experts every week.

Markets and macro insights with Bernard Swords, Chief Investment Officer

Key takeaways

1. Volatility is high but markets are reacting to geopolitical news rather than to any breakdown in economic conditions.
2. De-escalation remains the key upside risk; even small signs of easing tensions have already shown how quickly sentiment can improve.
3. Energy prices are elevated, but the economic impact is probably overstated.
4. Growth is slowing but forecasts still point to positive growth across major economies.

How are developments in the Middle East moving markets? 

• Last week there were pronounced swings in financial market sentiment, largely driven by developments in the Middle East conflict and its implications for energy markets and inflation. These geopolitical events have been the dominant influence on asset prices, with economic data releases producing limited impact.
• We began the week on a constructive note, following US President Trump’s announcement of a pause in strikes against Iran. There were encouraging indications from Iran that it may allow independent shipping through the Strait of Hormuz. These signals were interpreted by markets as early signs of de-escalation. As the week progressed, however, conflicting messages from both sides led to renewed uncertainty, with investors seeing no clear path towards a resolution. The signs of de-escalation are nevertheless important, as they may suggest that we are passing the worst stage of the conflict.

How did the swings in market sentiment affect performance?

• Against this backdrop, equity markets declined by just over 1% in local currency terms over the course of the week, while euro area fixed income markets weakened. Government bonds have been particularly affected, reflecting their longer duration and growing concerns around fiscal pressures across developed economies. In the US, the cost of the conflict is adding to deficit concerns, while in the euro area there is increasing discussion around fiscal measures to offset the cost of living impact of higher energy prices. Within equity markets, defensives were to the fore with Healthcare, Consumer Staples and Utililites all up modestly during the week. IT and Communication Services were the weakest sectors. Company‑specific pressures have also come into play. Meta was found liable in a social media addiction trial, while Alphabet (Google’s parent company) suggested that its latest AI model will require significantly less computing power which weighed on semiconductor stocks. More broadly, rising bond yields have added further pressure on the sector, amplifying investor caution.
• The principal macroeconomic concern remains the inflationary impact of elevated energy prices. While prices were flat over the week, they remain close to their highs since the conflict began. The key questions for markets are: how long will energy prices remain elevated? And to what extent will higher costs feed through into core inflation? The European Central Bank (ECB) has emphasised that all meetings are now “live”, increasing the likelihood of interest rate rises in the euro area should inflation pressures persist. Similar concerns are beginning to emerge in the US, where markets are increasingly focused on upside risks to inflation.

What are the latest indicators telling us about growth? And how do higher energy prices factor into the outlook?

• The euro area purchasing managers’ indices (PMIs), showed a modest softening in March compared with February. The easing was concentrated in the services sector, while manufacturing activity held relatively steady. Sub-indices suggested some weakening in new orders, alongside a pickup in delivery times, pointing to supply side pressures.
• Over recent weeks, several institutions, including the ECB, the US Federal Reserve, the International Monetary Fund (IMF) and several major investment banks, have revised their forecasts to reflect higher assumed energy prices. Under more extreme scenarios, where Brent crude averages between USD 120 and USD 130 per barrel over the next 12 months, forecasters estimate a reduction of around half a percentage point in growth across major regions. Even in this scenario, growth remains positive, with the US economy expected to grow at around 1.75% and the euro area close to 1%. Importantly, this growth estimate remains well short of recessionary territory. From an investment perspective, a move to a more defensive stance would require a deterioration in nominal GDP growth into negative territory. Even in regions where real growth may approach zero in some quarters, nominal growth remains positive.

Looking Ahead

Geopolitical developments will remain at the forefront of investors’ minds in the coming week, particularly any further signals around de-escalation in the Middle East and the implications for energy prices. Movements in oil markets will continue to be closely monitored, given their importance for inflation expectations and central bank policy.

The key release in the US will be non-farm payrolls, providing an important update on labour market conditions. This will be complemented by data on retail sales, consumer confidence and the manufacturing ISM, offering further insight into the resilience of domestic demand and underlying economic momentum.

In the euro area, upcoming releases include consumer confidence and inflation data, both of which will be closely watched in the context of monetary policy expectations. In China, attention will focus on the latest business sentiment survey, with the PMI providing a timely indicator of economic conditions.