“There’s little damage to energy infrastructure, so once the conflict ends energy prices will rapidly be able to recover and markets settle down again,” van Leenders said in a note. “In the scenario that we assume will play out and which initially involves an escalation, markets will remain volatile. The recovery in Europe and the US on the third trading day of the conflict provides no guarantee for the future. At an investment horizon of about six months, however, we assume that energy transports will have normalised and the global economy will be largely unaffected.”

He has therefore retained his overweight in equities, but this has been diversified away from the US to all four equity regions. In Europe, he believes his reasonably optimistic economic outlook is playing out. “The unrest in the Middle East has led to the US dollar acting as a safe haven but it could fall in value again once calm is restored. This would be negative for European investors in US equities. We’ve retained an overweight in the US though as the outlook for growth and earnings is positive there,” van Leenders said.

“Our more positive outlook for European growth is also expressed in the fixed income portion of our investment policy. We hold an underweight in eurozone government bonds. A more robust economic cycle and expansive budget policy in Germany could push up bond yields,” he continued.

Spreads on French and Italian government bonds have tightened recently, which has contributed to the performance of these bonds. Looking ahead, he sees little potential for these to tighten further. He has offset the sale of eurozone government bonds by purchasing eurozone credits, marginally expanding the overweight he already held in the latter. Spreads on these credits are also tight, but as long as they don’t alter radically, he believes they will generate additional return.

Equities – overweight
Van Leenders has retained his overweight in equities, although he has diversified this across all regions. In the US, he sees sound growth and strong earnings dynamics. “Earnings dynamics are less strong in Europe, but there are signs that confirm this reasonably optimistic outlook for growth. Earnings momentum is strong in the Pacific region and emerging markets. Earnings are being adjusted upwards at an especially high pace in Korea and Taiwan. This can largely be attributed to investments in artificial intelligence infrastructure,” he said. The diversification of the equity overweight also enables him to diversify his exposure to AI-related trends. On sectors, van Leenders said that they are overweight in IT and in financial services.

Government bonds – underweight
Short and long-term bond yields fell in the US, UK, Japan and Germany in February. At the short end of the yield curve, the biggest downturns were in the UK, where economic data marginally increased the probability of cuts to interest rates by the Bank of England, and in the US. At the long end of the yield curve, 10-year bond yields in the US, UK and Germany were down by about 20 basis points, in Japan by slightly less. In general, van Leenders doesn’t think these lower yields match the economic picture of resilient economies and inflation which, on balance, was slightly higher than expected in the US and eurozone. He has reduced his position in government bonds to an underweight. He doesn’t hold a position in US government bonds and his position in the eurozone is smaller than in his strategic allocation.

Investment grade credits – underweight
From an economic outlook, van Leenders anticipates little change to spreads on credits, but rising government bond yields do pose a risk to the total return, especially in the US. In the US, he prefers equities to investment grade credits. He has slightly expanded his allocation to investment grade credits. His underweight in the US is bigger than the overweight in the eurozone, therefore he holds an underweight in this asset class.

High yield credits – neutral
Europe is more sensitive to higher energy prices. Van Leenders retained his neutral outlook for high yield credits. At reasonable economic growth in the US and Europe, he doesn’t expect spreads to widen. The spreads generate a reasonable additional return versus government bonds. The tight spreads lead him to believe that there is less upward potential for high yield credits than for equities.

Emerging market debt – neutral
Emerging market debt offers an attractive rate of return, although spreads on bonds listed in US dollars are tight. Van Leenders views rising yields in the US as a risk to this asset class. The desire for a weaker US dollar isn’t negative. Bonds listed in local currency have profited from interest rate cuts by central banks, but he thinks these are coming to an end. On balance, he retains his neutral outlook for this asset class.

Listed real estate – neutral
Van Leenders holds a neutral outlook for this asset class. He thinks global developed listed real estate valuations are expensive compared with interest rates, while Europe has a neutral valuation.

Commodities – neutral
In the longer term, Van Leenders expects oil prices to fall marginally again to current levels or below them due to structural factors, such as decreased demand for oil from China and electrification. The price of gold increased to over $5,200 per troy ounce in February. The growing speed at which the gold price has risen in recent months leads him to conclude that these upturns are increasingly speculative in nature. The heightened geopolitical uncertainty, including the outbreak of a new conflict in the Middle East, is shoring up the gold price. Although in the shorter term a slowdown in Chinese economic growth will have a downward effect on demand for metals and on prices, he believes that copper looks well positioned in the longer term for structural trends such as the energy transition and AI.