We think recovery stems from investors eventually focusing on business and economic conditions rather than being overly influenced by conflicts and tensions that tend to be geographically confined.

As for where the oil price may go, the 1980 – 1988 Iran-Iraq War may be a useful reference. That conflict followed a decade of dramatically higher oil prices that contributed mightily to the terrible inflation of the 1970s, but oil prices fell over the 1980s¹ as discipline among Organization of Petroleum Exporting Countries (OPEC) broke down as key players, like Saudi Arabia, increased supply, and non-OPEC production, such as in the North Sea, was developed quickly.

At the same time, car buyers preferenced smaller and more fuel-efficient vehicles, which contributed to bending the oil price curve. All up, even with the protracted Iran-Iraq War, the 1980s is recalled as a decade of positive economic growth, falling inflation and lower oil prices (Chart 2).

Chart 2: Prolonged Iran-Iraq war saw lower oil prices 

Portfolio positioning

We are disciplined investors with a long-term focus and thus not given to knee-jerk reactions to geopolitical events. Moreover, strife is sadly ever-present in the Middle East and so investment professionals like us take these happenings in our stride.

We can’t change what governments and political leaders do and instead focus on controlling the controllables. We succeeded in navigating our clients’ investments through past disruptive episodes and are confident that the skills, knowledge, and judgment across our investment team will prove up to the challenge ahead.

Diversification remains a cornerstone of our investment approach. By spreading investments across various asset classes, it means that our clients’ portfolios are not overdependent on strong returns from a handful of assets for performance. Instead, returns are accumulated from multiple sources.

Furthermore, in volatile periods, better returns from some parts of portfolios, can potentially offset weaker returns from other parts, which helps to smooth returns.

We have had an ‘underweight’ position to the US share market for some time and have instead deployed more of our clients’ funds to non-US markets, which we judge as being better valued.

Exposure to alternative investments, like insurance related investments, continue to provide portfolios with an attractive source of diversification given that their performance is not related to share market performance.

Our allocation to real assets via unlisted infrastructure, and unlisted property investments provide diversification benefits, along with long-term, stable and predictable cashflows often linked to movements in inflation. Likewise, private equity remains an important part of select portfolios owing to its diversifying attributes and strong long-term return potential.

We have continued to find compelling opportunities in income-focused credit strategies as companies’ financial metrics remain reassuring. In the United States, the country’s large structural budget deficit raises the prospect of a higher supply of long-dated bonds, and we have positioned our portfolios to take advantage of changes in the risk-return mix this will create.

Having a dedicated in-house derivatives team capability also means we’re well placed to capture opportunities that present across various markets, whether they be in commodities, share market indices, or even through protection strategies where we believe market risk is unlikely to be rewarded.

We are strong advocates of active portfolio management because markets move and change, and psychological factors can cause hasty actions by some market participants. This creates opportunities for those who can look through events and buy good assets at attractive prices.

Positions like those discussed in this note provide high levels of diversification, and, in our view, form important parts of well-managed portfolios.

¹Crude oil prices 1947 - 2004, https://ibs.colorado.edu/barham/courses/econ3070/2008/Chp2/oilprice1947.pdf