Julius Baer CIO strategy for uncertain markets, global markets; Gold reserves near 30% of central banks

Julius Baer CIO strategy for uncertain markets, global markets; Gold reserves near 30% of central banks

Geopolitics, gold, and global equities: Our CIO’s strategy for uncertain markets | Julius Baer

An equity investor who has not reviewed the value of their investments since the outbreak of the war would, based on market performance alone, find it difficult to infer what has transpired in the Middle East in the interim. That is unless their portfolio includes direct or indirect exposure to oil & gas. Both the S&P 500 Index and the Nasdaq Composite Index have fully recouped their losses since the start of the Iran war, reaching new record highs. Global equities have followed suit, building on their strong performance at the beginning of the year.

Despite the improved near-term sentiment, it is too early to change course in portfolios and switch back to an uncompromising risk-on mode. For the time being, the potential for re-escalation cannot be ruled out and policy uncertainty extends well beyond the narrow time window implied by the current ceasefire. In such an environment, volatility is likely to remain elevated, and risk premia remain vulnerable to sudden repricing, which renders profitable implementation of tactical portfolio adjustments even more difficult than under normal conditions. In the meantime, we caution against armchair geopolitical forecasts.

Navigating external shocks: How to position your portfolio

Granted, external shocks are, by definition, temporary rather than steady-state conditions. In most cases, once the initial emotional response to the shock has dissipated, the market transitions back to an economic expansion environment. In rare cases, the shock is severe enough to alter global growth and inflation trajectories in a way that ultimately leads to either an economic contraction or an inflationary spike. In the current situation, investors’ primary concern is that disruptions to energy supply chains could persist for long enough for the shock to generate adverse real-economy consequences on a global scale. From an investment perspective, and as long as no definitive conclusion as to the direction of travel can be drawn, the most sensible course of action is to stay the course with a neutralised risk load in portfolios. When visibility is low, a portfolio’s natural fallback position should be its Strategic asset allocation (SAA) rather than a move to cash. By definition, an effective SAA should be calibrated to be viable, i.e. robust enough to withstand all market environments, including periods of geopolitical turmoil.

By adjusting the equity hedge on the S&P 500 Index in mid-March, we have adhered to this principle, taking our stance on equities closer to neutral. As a reminder, we systematically apply partial hedges to fine-tune equity risk in our portfolios. In this way, one can have a small overweight in equities and hedge the excess risk with futures or options, rather than being structurally underinvested. During stable and bullish market phases, this strategy subtracts a few basis points from performance, but the overall returns can remain attractive as we stay well invested. Most of the time, it pays to be fully invested. De-risking portfolios through an outright sale of assets requires a compelling endogenous bear case.

Gold remains a core portfolio hedge

Meanwhile, a notable deviation of our current portfolio positioning from our SAA is an overweight position in gold. We remain comfortable with this exposure, as the yellow metal continues to be supported by several structural factors, notably the weaponisation of Western capital markets and the rising indebtedness of G7 (Canada, France, Germany, Italy, Japan, the UK, and the US) governments. In other words, gold remains an essential hedge against continued G7 fiat currency debasement. It is also worth highlighting that gold’s share of central banks’ foreign exchange reserves is approaching 30%, surpassing the share held in US Treasury securities for the first time in 30 years. That said, the current consolidation phase may extend for a while, as gold remains vulnerable to profit-taking in the case of sharp increases in US dollar liquidity demand – as recently observed at the onset of the war.

Amid the broad variety of unknowns in today’s geopolitical environment, there is one lesson that can safely be taken for granted: the Iran war is yet another indication that the post-World-War-II, US-led, rules-based world order has effectively ceased to exist. As self-sufficiency across a broad range of areas becomes a matter of national security in major economies, choke points that control access to critical resources – such as the Strait of Hormuz – are increasingly vulnerable to weaponisation. No global power can sustain undisputed military dominance without a robust domestic industrial base and secure critical supply chains.

Although European and emerging markets are affected disproportionately more in the short term by rising energy prices, we do not believe in a return to the US-asset-dominance regime that prevailed until the end of 2024. The current relative strength of US assets is likely to prove temporary, reflecting the exceptional circumstances created by the current energy crisis. As these circumstances normalise, we expect the relative performance pendulum to swing back in favour of non-US equities, precious metals, and strategic commodities and resources – akin to the dynamics observed in January and February of this year. Early signs that this reversal is gaining traction are already visible when observing the US dollar. The US Dollar Index has retreated to below the 99 level, already unwinding some of its gains from March. In a historical context, the 2%–3% appreciation since the start of the Iran war is relatively modest compared with similar geopolitical incidents, as scepticism regarding the US dollar’s safe-haven status has persisted.