Market and Trust review
The conflict in the Middle East following US strikes on Iran led to a selloff in global equities (MSCI ACWI -5.4% in March) and heightened volatility as expectations shifted on the length of the conflict and the level of impact from the associated energy shock. Global financials fell 4.9% with Europe and Asia relatively weak, reflecting their greater economic sensitivity to the conflict compared to the US.
By subsector, the elevated macro uncertainty weighed most on the banking sector, particularly in Europe, Japan, South Korea and India. The Trust’s NAV fell 4.6% with the negative impact from the overweight in European banks offset by support from trading platforms, which are beneficiaries of the pick-up in volatility, and non-life insurance holdings.
Middle East conflict
The US and Israeli attack on Iran on 28 February and subsequent closure and disruption to the Strait of Hormuz led to a spike in energy prices, with Brent crude at one point reaching $119.5 per barrel, its highest level since 2022. The lack of clarity on the US administration’s ultimate objectives and timeline for the conflict added to uncertainty and market volatility.
From a regional perspective, Asia is more reliant on energy supplies through the Strait, receiving 75% of the oil and 59% of the liquefied natural gas (LNG) that passes through it. Asia is also more vulnerable to higher food inflation - over 30% of global urea and 20% of ammonia exports are now blocked or disrupted. However, Europe is now facing its second energy shock in four years with its post-2022 energy strategy of replacing Russian gas with Qatari and US LNG leaving it exposed to higher wholesale prices.
What will hopefully prove a short-term disruption to energy markets is likely, in our view, to have more profound consequences in terms of international relations. The EU is looking to accelerate its strategic autonomy plans with the relaxation in national fiscal deficit rules dependent on moving procurement to within the EU and reducing its reliance on the US. Questions on the reliability of US security and trade policy will continue to play out across regions during this period of reconfiguration.
Portfolio changes
In light of the uncertain outcome to the conflict, we reduced risk in the portfolio by shifting to more defensive areas. During the month, we added to trading platforms (IG Group Holdings; Plus500) that are beneficiaries of a pick-up in volatility and trading activity.
IG Group Holdings’ share price rose 10% in March with sentiment on the stock supported by a positive FY25 update which noted an acceleration in active customer growth and platform engagement during March. The announcement of a strategic review to be released in the autumn points to continued momentum under the new management to position the company for long-term growth.
The derisking in markets in the past two months has opened up attractive recovery opportunities should there be a swift resolution of the conflict, given the earnings impact to date appears to have been limited
While feedback from European banks on recent operating trends has been reassuring - see details below - we retained an overweight position but reduced our exposure given the economic risks to the region associated with a prolonged energy shock. These reductions were partially offset by an increase in our non-life insurance holdings in Europe and the US along with additions to our holding in Oversea-Chinese Banking Corporation (OCBC) in Singapore. The perception of Singapore as a relatively safe haven for global wealth - 77% of Singapore’s AuM originates from outside the country - is likely to be enhanced by recent events in the Middle East. Boston Consulting Group estimates that Singapore will see the fastest AuM growth of major global wealth centres, rising from $1.9trn in 2024 to $2.8trn in 2029.
Management feedback
Morgan Stanley held its European Financials conference in March and commentary from managements provided reassurance on current operating trends, with the caveat from banks that guidance was contingent on a relatively swift resolution of the Middle Eastern conflict. Asset quality is expected to become more of a factor if the energy disruption persists into the second half of the year.
The headwinds associated with higher provisioning from a modest slowdown are expected to be offset by the shift in interest rate outlook in Europe and the UK. Comments on AI highlighted a range of views and reinforced our conviction that it will provide a material competitive advantage for those banks that have invested time to clean their data and have the infrastructure in place to capitalise on both the cost and revenue opportunity.
Regarding the risks to deposit pricing and stability from agentic (autonomously acting) AI, managements noted that pricing was only one element for customers, with insufficient gains for average depositors to change trends in behaviour while regulators were unlikely to support the facilitation of bank liquidity risk.
Outlook
The derisking in markets in the past two months has opened up attractive recovery opportunities should there be a swift resolution of the conflict, given the earnings impact to date appears to have been limited. We have looked to take a balanced approach to our positioning given the unpredictable nature of the conflict and range of possible outcomes as we approach a critical period of negotiation. Should geopolitical risks fade, we expect the focus to remain on both AI and private credit exposures and have positioned the portfolio accordingly.
