President Trump’s announcement of a new peace initiative and an indication, by Iran, that “non-hostile” ships would be permitted safe passage through the Strait of Hormuz, eased fears of an oil shortage and Brent Crude obligingly dropped below $100 per barrel.

Brent Oil Price Per Barrel

Source: Bloomberg

This gave a boost to both equities and bonds which responded positively to the new initiative.

There are a couple of things that are interesting regarding this recent crisis.

The first is that the VIX Index (an indication of volatility expected by markets and known euphemistically as “The Index of Fear”) has risen a lot less than in recent crises, as indicated by the chart below.

VIX Index

Source: Bloomberg

The second is gold being one of the worst performing assets since the onset of hostilities at the beginning of the month. I have referred to this as “the dog that didn’t bark” and it just goes to show that the only safe “hedge” against rapidly declining asset prices is to not be invested in those assets in the first place. In practical terms, for investors with an average risk appetite and a long-term time horizon, avoiding assets that move up and down will also mean they miss out on the opportunity for above-average real returns. The safest way to capture these returns, whilst minimising risk, is to pick your assets carefully and then diversify across different asset classes and securities, which is the bedrock of what we have done for our clients since Courtiers was founded in 1982.

Nobody can say with certainty if, or when, the current conflict will end but, as I have said from outset, it is in nobody’s interest for the hostilities to continue and there will be considerable international pressure for the protagonists to find a settlement. My best guess is that this will happen sooner rather than later. The market seems to think so, which is one reason why, so far, the VIX has peaked at a significantly lower level than in recent crises. Let’s hope, for the sake of our energy bills, the climate and especially the people of the Middle East, that the market is right.

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