Back
Hostilities have resumed in Iran and oil is back at $100 a barrel having been $70 at the start of the month. As always with these sorts of geopolitical events I am not sure anyone really knows what will happen next. Predicting the actions of irrational actors is hard. But the right strategy for Middle East shocks in recent times has been to look through them to some sort of resolution. And, looking at my screens, I think this is broadly what equity markets are doing today. The MSCI World index is down -0.85% for the month as I type, which hardly smacks of war related panic.
One other complication when thinking about oil is that Q2 earnings season is also underway. And the market remains very focused on the direction of travel for AI infrastructure spend. Of the 5 Hyperscalers, only Google has reported so far. It announced 24% year-on-year revenue growth, strong AI usage growth and an increase in infrastructure spend. But it also reported its first ever negative cashflow quarter as a public company and the stock fell -7% on the day. The market remains laser focused on what the returns will actually be on all this AI infrastructure investment. Q3 will give us a better window on this, and will, I think, end up being a more important market story than oil. (As always, nothing in this note is meant as investment advice, nor do we buy individual company stocks in our portfolios outside of the investment trust space).
Three other observations on what has been another busy week.
- If higher oil prices and AI make you nervous, then the UK’s FTSE 100 index remains a potential safe haven. The oil majors benefit from the oil shock and the UK’s weakness is also its strength. Having very few AI winners means the FTSE 100 index should be resilient (on a relative basis at least) to any slowdown. And continued M&A activity is helping support the smaller FTSE 250 Index. Both the FTSE 100 and the FTSE 250 are up for the month as I type.
- If equity markets are (so far) not overly concerned about the oil price spike, the same is not true for bond markets. UK rates are back near the highs for the year and gilts are following oil prices much more closely than they are the news that is emerging from the new Andy Burnham led government. Lower UK rates would help the UK in plenty of ways: most obviously for the struggling property sector and to reduce the government’s borrowing costs. But, today, those rates look to be hostage to events in the Middle East.
- Finally, a word on gold. One interesting thing was that gold was not a hedge or a diversifier when war broke out in March. It simply fell sharply with equities and then kept falling even as equities rallied. It does, however, look to have found some sort of base. The central bank buying that underpins the gold market remains in place (see the chart below) and gold is up (a little) for the month. Now a lot of the hot money seems to have left the market, gold may go back to being a useful diversifying asset for portfolios.
Source: Lombard Street Research
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
