Portfolio Update

Over the past several months, we have highlighted that elevated valuations and aggressive earnings estimates across segments of equity markets represented a key risk to our outlook, particularly in an environment characterized by persistent geopolitical and trade-related uncertainty.

The recent escalation of conflict in the Middle East following the U.S.–Israeli intervention in Iran at the end of February has reinforced this uncertainty. Financial markets reacted quickly, with energy prices rising and assets such as stocks and bonds experiencing increased volatility. Oil prices moved higher, with West Texas Intermediate (WTI) surpassing $80 per barrel at the time of writing, reflecting the market’s reassessment of potential supply risks and the broader implications for global trade and investor sentiment.

How Could the Conflict Affect Global Energy Supply?

At present, the central question for investors is the extent to which the conflict could disrupt oil supply from the region and for how long.

A key risk relates to the Strait of Hormuz, one of the world’s most critical energy corridors. Roughly 20 million barrels per day of crude oil and refined products pass through the Strait, representing one-fifth of global oil supply during normal conditions. At the time of writing, less than one million barrels per day of crude oil are being exported through the Strait. Saudi Arabia is working to redirect approximately five million barrels per day to its Red Sea port of Yanbu. As a result, the market is currently facing a shortfall of roughly 14 million barrels per day. The extent of the impact will ultimately depend on the duration of the disruption. Current indications suggest that interruptions to tanker traffic have been largely precautionary, as maintaining the flow of energy through this corridor remains critical for the global economy.

Recent statements from the U.S. administration suggest that the military campaign may be relatively short in duration, potentially spanning a few weeks. If true, this would reduce the likelihood of sustained supply disruptions.

The effects of a temporary disruption would likely be felt most strongly in Asia, which receives approximately 85% of Middle Eastern oil exports. Imports from the Persian Gulf account for roughly 30% of China’s oil demand, 34% of India’s demand, and more than 60% of Japan’s. North America, by contrast, remains largely self-sufficient in both oil and natural gas, reducing its vulnerability to potential supply shocks.

Several major oil-consuming nations also maintain strategic inventories that could help bridge temporary supply disruptions. China and Japan hold reserves equivalent to roughly eight months of their imports from the Gulf, while India, South Korea, and Taiwan maintain reserves covering approximately two to three months. Asian countries have also begun taking measures to limit oil demand.

Beyond the immediate developments, the longer-term implications for global energy markets could also be meaningful depending on the duration and scope of the conflict. A prolonged war with severe supply disruptions could push inflation higher while slowing economic growth, creating conditions in which stagflation pressures may emerge. Conversely, if geopolitical conditions eventually allow Iranian oil production to return to global markets without sanctions, output could expand materially over time, increasing global supply and potentially exerting downward pressure on oil prices.

What Are the Potential Implications for Financial Markets?

In the current situation, energy markets have borne an immediate and direct impact, with rising oil prices and concerns regarding supply creating uncertainty that has quickly spread to broader financial markets. Changes in oil prices can influence inflation expectations, interest rate outlooks, and investor sentiment, which in turn affect both equity and bond markets.

Equity and bond markets have experienced periods of downward pressure as investors reassess the potential implications for global growth, inflation, and economic conditions. The impact on broader markets and the global economy will hinge on the severity and persistence of supply disruptions and the trajectory of the conflict.

How Are We Positioning Portfolios in an Environment of Elevated Uncertainty?

Across all outcomes, our investment approach remains anchored in the principles that have guided our firm since 1988, tested through geopolitical tensions, trade disruptions, and across various market cycles. We maintain a long-term perspective, remain price-sensitive, focus on fundamental analysis of quality companies, and pursue an international approach. Our principles continue to guide positioning, helping us navigate short-term uncertainty while focusing on sustainable, long-term value creation.

In light of elevated valuations and heightened volatility, we have gradually increased the cash position across client portfolios over recent months as several holdings reached or exceeded our fair assessment of intrinsic value. Diversification across sectors and regions further acts as an additional risk management tool while supporting long-term returns. Together with a moderate cash buffer, this positions us to redeploy capital into attractively priced opportunities as they arise, in line with our disciplined, fundamentals-driven approach.

Patience during periods of market volatility, while unsettling in the near term, has historically rewarded long-term investors. Short-term fluctuations are viewed as opportunities to selectively add to our high-conviction positions and, where valuations are compelling, in new opportunities that emerge, rather than as triggers for reactive decisions. One should never forget that selling inevitably requires a future decision to buy, and historically, successfully executing both has proven challenging. Often, by the time it feels safe to re-enter, prices have already recovered, making the timing of both decisions difficult to get right.

As with most geopolitical developments, the situation remains fluid. We continue to monitor events closely and will reassess our views as further information becomes available.