West Asia conflict: The ongoing conflict in Iran and the surge in oil prices pose a risk to traditional balanced portfolios — even though losses have remained limited thus far, according to Goldman Sachs Research.
According to Christian Mueller-Glissmann, head of asset allocation in Goldman Sachs Research, Stocks have declined and bond yields have spiked since the start of the conflict, but so far, the losses to balanced portfolios like those containing 60 per cent stocks and 40 per cent bonds have been ‘relatively small’.
Mueller-Glissmann said, “To assess how little damage has been done to global 60/40-type strategies, you can look at our world portfolio proxy.”
This portfolio, which is worth around USD 300 trillion and made up of virtually all the world’s financial assets, has only declined by around five per cent since the start of the war.
“Compared to historical 60/40 drawdowns such as in 2022, that’s a very modest decline so far,” Mueller-Glissmann added.
A 60/40 portfolio generally refers to a portfolio split between S&P 500 stocks (60 per cent) and 10-year US Treasury bonds (40 per cent).
Global portfolio performance since the onset of the Middle East war
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Source: Bloomberg, Datastream, Goldman Sachs Research
Apart from commodities, the most significant shifts have been observed in bonds, where short-term yields have surged, the research highlights. However, the upward pressure on long-term bonds has remained relatively subdued compared to previous periods of market turbulence, including the inflationary spike caused by the COVID pandemic in 2022 or the stagflation of the 1970s. Furthermore, the war has not had a substantial impact on economic growth expectations, thereby limiting the downside for stocks.
Mueller-Glissmann also shares insights on how markets are reacting to the ongoing conflict in Iran and hearing his views on what constitutes an optimal portfolio.
Why did the stock market not decline further due to the Iran war?
“I think there are two elements. First of all, there’s a certain concern about reversal risk. Around the Liberation Day shock when equities reacted very strongly, the market aggressively re-priced growth, and then you got a pivot on the policy side that prompted a major reversal in markets. Maybe investors have been reluctant to adjust portfolios too aggressively around the geopolitical shock this time,” Mueller-Glissmann said.
How are rising interest rates impacting investment portfolios?
He said that when you get a rate shock, it weighs on 60/40 portfolios and means that bonds cannot help you in buffering growth shocks.
“The risk is always that the rate shock becomes a growth shock, because higher rates tighten financial conditions, tighten credit conditions, and can weigh on markets more broadly, which can in turn feed into growth,” he added.
What is the outlook for the 60/40 portfolio this year?
As per the research, baseline expectation is that, following a period of persistent volatility, markets will finally stabilise. Our macroeconomic outlook for the remainder of the year is that neither will a recession occur nor will inflation spiral out of control; this implies that, in the medium term, growth expectations will stabilise, and 60/40 portfolios will regain their strength.
A machine-learning-based model that predicts the likelihood of a sustained decline for 60/40 portfolios for the next 12 months is still reasonably low because growth is still good, inflation is not accelerating as much, and policy is still easing, the research added.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
