Geopolitical tensions in the Middle East and global macroeconomic uncertainties are returning to the center of investors’ attention, but for now they are not leading to immediate changes in asset allocation. Alex Rohner, fixed income strategist at J. Safra Sarasin, explains this by underlining that the approach adopted remains based on probabilistic scenarios: the worst-case scenario is attributed a probability of 35% and involves a prolonged closure of the Strait of Hormuz, with oil stably above 100 dollars a barrel and significant consequences on the global economy and risk markets. In alternative scenarios, however, the resolution of the conflict would be relatively rapid, with limited effects on energy prices and international trade. In this context, the strategy remains unchanged but with constant monitoring of any changes in the probabilities of the different scenarios.
Fixed income, what opportunities
In fixed income, the most attractive risk-reward opportunities appear to emerge along the middle part of the curve. The implicit monetary policy rates discounted by the market – in particular for the ECB – appear excessive compared to the expected macroeconomic scenario. The allocation therefore remains balanced between high-quality government bonds and credit, maintaining an overall neutral position. From a tactical point of view, duration is concentrated in the highest quality securities, while in the credit segment there remains a preference for shorter maturities.
The view of J. Safra Sarasin
On the sector front, the current phase of market nervousness has not yet translated into sufficiently attractive valuations to increase exposure. Credit spreads, both in investment grade and high yield, remain close to historic lows at index level. While observing a certain dispersion between sectors, risk remuneration still appears insufficient, especially in light of the high uncertainty regarding economic and technological developments.
In a more fragile geopolitical context, however, it makes sense to move towards high-quality financial issuers and the energy sector outside the Persian Gulf. At the same time, there is a rotation away from stocks linked to discretionary consumption, which are more exposed to the persistence of inflationary pressures and possible weakness in demand.
As regards inflation-linked securities, market pricing on shorter maturities already appears very tight, leaving limited space for further revaluations. The recommended approach therefore remains prudent on this segment. On the contrary, long-term inflation expectations – expressed by the longest breakevens – appear substantially correct and do not highlight particular misalignments, justifying a neutral position on the asset class.
Iran unknown
Looking ahead, one of the key geopolitical risks for bond markets remains whether Iran can sustain a prolonged disruption to oil flows through the Strait of Hormuz. A persistent energy shock could push the price of oil significantly higher, with negative effects on global growth and risky assets. In this scenario, the search for safe havens could lead to a decline in the yields of high-quality government bonds.
