Taking profits on convertible bonds
Since our entry a year ago, convertible bonds outperformed global corporate bonds by 6%. We are now taking profits, as they lag small caps due to high exposure to unprofitable tech and crypto firms.
Asset Allocation Update: March allocation confirmed despite the Iran conflict
The recent escalation in Iran is causing uncertainty in the financial markets. Nevertheless, in our view, the impact on the global economy and markets is likely to remain limited. We are therefore maintaining, for the time being, the adjustments to our asset allocation decided for March.
Author: Nicola Grass
Escalation in Iran: Short-term risk-off, but we remain constructive in the medium term.
What has happened?
- The escalation in the Middle East and the potential blockade of the Strait of Hormuz are leading to rising energy prices (oil price +35% YtD, +10% today), making further interest rate cuts more difficult.
- Global equity markets are recording losses of around 2%. Gold and the US dollar are in demand as safe havens, and volatility remains high.
- The announced production increase by OPEC+ is counteracting the rising energy prices.
- Global economic ties with Iran are limited. The main risk remains an escalation of the conflict and persistently higher energy prices.
How do we assess the situation?
Although the escalation in Iran has the potential to shift the balance of power in the region, we consider the risks for global financial markets to be limited. In the medium term, a relaxation is even possible. The attack did not come entirely unexpectedly. The main threat concerns the production and delivery of crude oil and natural gas exported to the Far East (e.g. to Korea and India). However, we expect that any potential supply shortages can at least partially be covered by other producers. In this respect, we assume that the historical pattern of geopolitical crises will repeat itself and that the rise in oil prices will be temporary (see chart below).
Historical impact of geopolitical crises on crude oil prices
At the macroeconomic level, the world economy’s dependence on crude oil has generally decreased, and regional diversification has increased. In an initial reaction, typical safe havens such as gold, the Swiss franc, and the US dollar, as well as defensive consumer or pharmaceutical companies within equities, are likely to benefit. Overall, global financial markets are supported by falling interest rates and solid, growing corporate earnings, which makes the economy more resilient to a limited exogenous shock.
How is our investment strategy performing?
On balance, we do not expect a significant effect, as we have established offsetting positions through purchases of commodities, US dollars, and basic materials equities, as well as existing overweight positions in gold and alternative investments. In the short term, our investment strategy, with a beta above 1, will suffer from the current risk-off sentiment. Small caps and emerging markets, in particular, are likely to react negatively, as both segments have performed strongly recently and are therefore more likely to be subject to profit-taking. In addition, they are sensitive to rising oil prices. Government bonds are currently showing little movement, so the impact on the bond side is expected to remain limited.
What adjustments are we making?
We are convinced that geopolitical risks are often overestimated and rarely have lasting effects on financial markets. The global economy is robust, and we do not expect a significant negative impact on corporate earnings. We therefore remain constructive and maintain an overweight position in equities. However, should the oil price rise above USD 100 contrary to our expectations, we would reassess the need to reduce risk.
What changes have we made to the portfolios for the month of March?
Sector rotation persists
Concerns about high levels of investment in artificial intelligence (AI) and the potential threat this technology poses to software companies are currently dominating the market narrative. According to the latest BofA Fund Manager Survey, market participants believe that companies are currently overinvesting in AI. The hyperscalers (Alphabet, Meta, Amazon, Microsoft, and Oracle) are expected to invest around 92% of their cash flow in 2026. This naturally increases the pressure to monetise these investments. We recognise the shifting sentiment and are therefore increasing our allocation to cyclical sectors such as small caps and basic materials, while reducing our exposure to the broad US equity market (see chart). However, we are maintaining our position in the US technology index Nasdaq, as tech stocks continue to deliver impressive earnings and, following their recent underperformance, are now trading at significantly more attractive valuations. A counter-move therefore seems possible.
Source: Bloomberg, Zürcher Kantonalbank
Environment remains supportive for risk assets
Given positive economic data, strong corporate earnings, and positive momentum, we believe the environment for equities remains generally favourable. Furthermore, the put/call ratio and various investor surveys indicate that euphoria has dissipated and investors have become much more cautious, which we view as a positive sign. As inflation in the US is now trending towards 2%, further interest rate cuts are to be expected. We therefore remain overweight equities, particularly in emerging markets. In the short term, geopolitical risks in Iran may cause some volatility. Our portfolios remain overweight gold and government bonds as a hedge in such scenarios. However, we expect the medium-term impact on financial markets to be negligible.
Hardly any changes in bonds and alternative investments
In February, bond yields fell across the board. The yield on 10-year US Treasuries is now just above 4%, putting us towards the lower end of the trading range. However, as investors remain significantly underweight in bonds, we are making no changes to our government bond allocation. The sale of convertible bonds has, however, slightly reduced our overall bond quota. We continue to see opportunities in local emerging market bonds and Australian government bonds, particularly in the currency, which we consider very attractive given a yield of 4%. No changes are being made to alternative investments, and we remain overweight in gold.
Our Tactical Asset Allocation in March 2026
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