After a month of significant geopolitical turbulance, a volatile environment is likely to remain, says Patrick Brenner, Chief Investment Officer, Multi-Asset, Schroders. Find out more in his latest multi-asset views below.

We came into the Iran war positioned for a benign cyclical environment with a bias towards inflation risk, given expectations of fiscal stimulus and a focus on supply chain resilience in a deglobalising and geopolitically tense world. This combination of views led us to an overweight position in equities and commodities and an underweight position in bonds.

We cannot predict what will happen next in the Middle East. We have decided to take profits on our broad commodity position as, after the spike in oil prices, the outlook is more balanced from here. That doesn't mean that volatility is over however as investors now need to determine how central banks might react to this stagflationary shock. 

Bonds

We don't think the situation is as extreme as 2022 in that the starting level of interest rates is considerably higher and the underlying level of inflation is lower. Nevertheless, we think there is further upside in bond yields and would expect the US 10 year to rise to 4.5%. We also believe there is upside to the US dollar as the US is less vulnerable to the energy shock. We also turn negative on US investment grade credit as current spreads offer little protection against the potential for stagflationary risks and increasing issuance (consistent with late cycle dynamics).

Equities

We maintain our overweight position in equities but have decided to close the overweight to international value stocks as financials remain vulnerable to rate concerns and the US is likely to be more resilient to any protracted oil price spike.

Gold

We remain long gold despite recent volatility, as we expect continued structural demand from emerging market central banks and see it as an important diversifier against fiscal and geopolitical risks. We also maintain our long position in local EMD given attractive real yields and better debt dynamics.

In conclusion, we still believe there is upside to equities as we see low risk of recession. However, we acknowledge the risk of protracted energy supply disruption and so we have reduced the cyclicality of our equity exposure and increased our exposure to the US dollar. We have monetised our long commodity hedges but remain underweight bonds as the level of yields poses a valuation risk to equities.

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