Considering Broad Investment Implications of US/Iranian Tensions

We believe the recent US airstrike may indicate a shift in US policy disallowing Iran’s stance of “plausible deniability” as it relates to proxy actions. It remains uncertain whether making Iran responsible for the actions of its proxies will truly act as a deterrent to further asymmetric threats by the Iranians, particularly while they remain under pressure of severe economic sanctions. However, preservation of the Islamic Revolution appears to remain the Iranian leadership’s primary objective.

The market reaction thus far has been more modest than we would have anticipated, and suggests that, in the absence of a retaliatory act by Iran, investors expect that this period of tension will pass. That said, we would note gold prices have been moving up over the past month, which in some part, can be attributed to increasing tail risks, including geopolitical tensions.

We would also note that when a new piece of information or an occurrence such as this is introduced, investors may reassess positions or rotate exposure into different holdings or sectors. This catalytic effect may result in changes that seem only tangentially linked to the situation at hand.

As a broad characterization, our equity investment teams were more sanguine about the outlook and our fixed-income teams saw the potential for heightened risk-premia in global markets.

Broadly, from a Global Macro and Multi-Asset Solutions perspective, we are focused on the potential for the tails of the distribution of potential market outcomes (from the most negative to most positive ends of the spectrum) to become “a little bit fatter,” emphasizing the importance of protecting the downside if events don’t follow the more likely benign path that we all hope to see.

What Are the Risks?

All investments involve risks, including possible loss of principal. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds adjust to a rise in interest rates, the share price may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging market countries involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Such investments could experience significant price volatility in any given year. High yields reflect the higher credit risk associated with these lower-rated securities and, in some cases, the lower market prices for these instruments. Interest rate movements may affect the share price and yield. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; their interest payments and principal are guaranteed.

This information is intended for US residents only.