Market outlooks

Hello and welcome to the multi-asset webinar on the 1st of April, 2026. My name is Lucy Dean and I sit within the wealth team covering the North of the UK. I'm joined today by Trevor Greetham, the head of our multi-asset team, and Melanie Baker, our senior economist. Today's session will cover recent events, their impacts on markets, and why diversification has never been more relevant.

We'll have a chance to answer questions at the end, so please send them through the portal. And with that, I will hand over to Melanie.

Thanks, Lucy. Alright. So, look, I don't know what's going to happen here any more than anyone else, but the economic effect will be worse the longer the conflict continues.

Do you think that, like, brief spikes in energy prices can leave very little mark on the global economy, more prolonged spikes and things get more damaging. And at the outset, I just want to point out that this crisis is already about more than just oil and gas prices. They know the disruption to trade routes is causing issues for the supply of all sorts of commodities.

And for me, things like the impact on fertiliser costs and availability is a particular concern, meaning essentially higher food prices down the line on top of any impact already had on that sector from higher energy and transport costs. So, big picture: energy shocks lead to higher inflation and lower growth. What happens to interest rates is a little less straightforward.

Right this first chart just gives a crude indication of where you might expect the energy components of CPI to go if oil and gas prices stay where they are. So, in this case, it's a very crude exercise that suggests energy inflation would move from slightly negative to perhaps 20% year on year. And, you know, with weights in the inflation basket of 5% to 10% in different economies — major economies.

Then you're looking at a crude approximation of an inflation impact of 1% to 2% higher. That shouldn't be much of a surprise if we get there. Another reasonable place to start, I think, are rules of thumb. So we can look at some of the scenario analysis and research done by central banks and other institutions on the impact of higher oil and gas prices on output growth.

So GDP and inflation and, you know, again, rising energy commodity prices look set to harm economic growth and drive up inflation at a global level. So the IMF have noted that a sustained 10% rise in oil prices could boost inflation by perhaps 0.4 percentage points. So a 10% rise in oil prices, would boost inflation by 0.4 percentage points and lower global growth by a tenth to two-tenths.

So if you kind of extrapolate that to the size of the recent increase in prices, then you're looking at maybe inflation boosted by perhaps two percentage points and GDP hit by maybe half a percentage point to 1%. Global growth overall is only about 3%, so that's the run rate. So, yes, it could be a significant hit and enough to take you perhaps to at least a threshold of recession.

So maybe focusing more on the US, Euro area, the UK. First of all, you might expect a little bit more of a modest impact on the US economy because the US is, of course, a substantial oil producer. We looked at some Fed research which suggests, perhaps on the current level of oil prices, more like a 0.8% rise in inflation.

And perhaps a 0.2 percentage point hit to GDP, So a bit lower than those initial estimates. On the Euro area, you'd expect maybe a bigger impact because they're a major oil and gas importer. And again, we looked at some ECB analysis. Maybe then you're looking at more like a 1.5 percentage point hit on higher inflation and three-tenths lower GDP growth.

So, at least these are reasonable starting assumptions. For the UK, then you might get slightly bigger effects again. And perhaps the shock to date could be more like two and a half percentage points higher inflation and half a percentage point hit to GDP. Actually, even in the UK, that's not obviously quite enough to kind of plunge you into recession

but again, you can sort of skirt the edges there — at least a sort of technical recession even with those impacts. But you want to be really careful with any of these sorts of models and impacts. The different approaches are available, other estimates are available, other models, clearly. And I think the other point is, again, coming back to those initial points — if the conflict suddenly calms down, these are going to be overestimates.

On the other hand, with strains being seen in refined products and other things, the impact could end up larger. And clearly the impact also depends on how governments and central banks respond to this Energy crisis — it's a really important aspect. Government subsidies, as we've seen already, for example, in Japan, could soften the impact on consumers.

And if this conflict continues, it wouldn't be surprising at all to see more temporary subsidies, tax cuts, other support programmes to at least support the most vulnerable consumers. Okay, but what about central banks and prospects for rate hikes? So we've now had at least inflation data for March from the Euro area. So here on the right-hand side chart, you can see that local headline CPI line in purple already starting to come up.

And that reflects the initial jump in energy inflation. That's just really the petrol and diesel price impact. I'm sure you've all noticed prices rising quickly at the pump, already very responsive to oil price changes. What central banks will be particularly alert to in coming months is all those other lines — signs of increases in core inflation, services inflation, pay growth, inflation expectations.

It's passing through more broadly. Okay, let's think quickly about the different central banks. I'll put Japan to one side. Before the conflict, I was expecting them to kind of raise rates gradually; I'm still pretty much expecting them to raise rates gradually. Coming into the conflict on the Fed side, the US Fed was expected to cut rates two to three times this year.

The Bank of England were expected to cut rates twice this year. The ECB was broadly expected to keep rates on hold. Now you look at things — markets and price hikes from the ECB and the Bank of England were no longer pricing in cuts for the US. I mean, think about Europe first. I don't think it would be very surprising if we saw what I would call insurance hikes in Europe — by which I mean one to two rate hikes designed to reduce the chance that we get stuck in a kind of higher inflation norm.

All those other lines and that kind of chart going up significantly. I think it's easy to see why central banks worry about inflation persistence — that period of high inflation that we put up with during the pandemic. You can see on the charts there — it's a really fresh memory for us all. And given the price level hasn't fallen back, things still feel much more expensive than they used to.

Then against that backdrop, there are risks that firms just find it easier to pass on higher costs to consumers than pre-pandemic. And so inflation expectations are at risk of rising. And even wage growth in this context —employees may perhaps now be expected to be compensated for cost of living shocks to at least a greater degree than they were pre-pandemic.

So to contain those risks, it makes sense for inflation-targeting central banks to at least consider precautionary insurance rate rises if energy costs don't fall back. In the Bank of England's case, inflation dynamics were stronger — for example in the Euro area, you can see that on the chart — going into this crisis, and worries about inflation persistence were already pretty prominent.

What about the Fed rate hikes? Look, rate hikes at least look less likely in response to this energy shock than they do in Europe. The Fed's dual mandate does put them in a bit of a different position. But even the Fed was already alert to upside inflation risks. And in comments this week, Powell said that the Fed is inclined to look past the energy price shock.

But five years of above-target inflation means that they can't take for granted that inflation expectations won't rise. But for now, the Fed's messaging has been pointing more towards delayed cuts, than hikes. A slide here shows the PMI business surveys which we do have for March. The right-hand side chart there is the PMI business survey indicator for output prices.

So reflecting that businesses are increasingly saying they'll have to raise prices. So you're back in that case for insurance rate hikes again. On the left-hand side, you can already see a general worsening there in the activity indicator. And in the middle you can see the one for employment has deteriorated too. In particular, look at the UK — it was already really quite weak, standing out against other economies.

It's got a little bit weaker. More generally, that is the danger I think — that policymakers focus on fighting the last battle. So again, fresh in their minds is going to be 2022. Inflation rose a lot; sharp rate rises followed. But maybe tightening policy now would reduce the risks of that scenario.

But again, economies like the UK that haven't been growing very much, sitting with soft labour markets, maybe means they're going to have to cut rates. I think rate cuts would look more likely down the line. With that, I'll happily hand over to Trevor.

Great, okay. So I'm going to put this in a bit of longer-term context, but then I'm going to come back to how you might want to think about the various scenarios over the next few weeks as well. So, 'Spikeflation' and the Iran War. If you look at the chart on the left-hand side of your screen — where Mel's charts were for the last five years — this is the last 110 years.

Okay. So slightly more long-term context here. That left-hand chart shows you in purple, US RPI retail price inflation back to 1915. And what I've done there is I've shaded in those vertical grey bars — periods of high inflation. And that turquoise line is the price level. So, you can see sometimes it's rising gradually, as we saw from sort of 1980 to the time of the pandemic.

And sometimes it's rising more steeply, as we saw in the 1970s, as we saw around World War Two and as we saw during World War One. And you can see I've also shaded in the period from the pandemic onwards, and you can see that steeper rise in the price level that we're seeing. So, the point to make about that left-hand chart — certainly in the UK historical record...

In the US — I've looked at Ireland, I've looked at Germany — the major developed economies: high inflation is almost always spiky inflation. When inflation is high it's unpredictable. You don't get 7% followed by 7% followed by 7%. You get 20% followed by 1%, followed by 2%, followed by 15%. And what that's really saying is that high inflation historically has come in the form of price level shocks.

On the right-hand side of the screen, you've got a list of different factors we've been talking about really since the pandemic onwards, of why we think we've moved from a low, stable inflation paradigm to a spiky inflation paradigm. And it starts with the Covid stimulus in the pandemic. So number one on the dial there at the top left — we had wartime levels of fiscal and monetary stimulus.

In a supply-constrained economy, the stimulus was left in place as the economy was reopening, and that resulted in the old-fashioned too much money chasing too few goods, and you got prices rising very rapidly. That played into number two, which is chronic commodity underinvestment. I've been a commodity investor in multi-asset funds for more than 20 years. Most of that time you had excess capacity bearing down on prices and things like the discovery of US shale.

But recently you've had a period of underinvestment, really since the financial crisis, and the fossil fuel underinvestment has been increased by the transition to net zero. So you've had this period of basically tight commodity supply. That means that when you get a demand shock or an interruption to supply, prices in commodity markets can move very rapidly higher.

Then we move on to de-globalisation. That can include everything from Brexit to the breakdown of NAFTA to the tariffs which we're seeing at 1930s levels from America — on-shoring and production capacity, breakdown of trading relations with China as it became a bigger economic and geopolitical power. But we see that all the time: de-globalisation. We've got structural changes to labour markets, which is a bit of a catch-all.

Some of that's demographics — an ageing population. Some of it is actual deportations or threats of deportation in America, which tightens the labour markets, particularly in agriculture and hospitality. You've got massive public spending programmes of all kinds and populism, which makes it really hard to do any kind of austerity or spending cuts. You've got the heightened geopolitical risk, which obviously was part of the spike in inflation in 2022 with the invasion of Ukraine.

And you've got above all of this — and I think probably the most important one — high levels of debt and financial repression. When you've got high levels of debt, both sovereign and private sector debt, it becomes very difficult for central banks to raise interest rates to fight inflation. There's a temptation to let it rip. It's always accidental. We've got inflation targets.

They'll say sorry afterwards, but you can already see it in the debates in central banks: should they raise interest rates now to fight inflation? Or are they worried that everything's so fragile because of high levels of debt — that they should be cutting interest rates. You can already see that debate coming through. In some ways we're back to the 1970s.

So what we're seeing here is oil price shocks. And although people don't put it this way, I'm going to explain it on this slide — how even the Covid pandemic was actually an oil price shock. On the left-hand side, I've got a couple of charts that have been doing the rounds recently. They're a little bit provocative.

On the left-hand side, you can see, first of all, US CPI and then next to it, you've got UK CPI or RPI in the '70s. And what I've done is I've taken the two inflation spikes in the 1970s period of 'Spikeflation', shown in purple. And I've shifted the dates on the recent inflation spike from Covid, which is shown there in turquoise.

So it lines up with '73/'74 and, kind of roundabout, now they would be the second big inflation spike of the 1970s. Now, in the '70s, both of the inflation shocks were oil shocks. You can see in the table there the oil price at the start and the high in the Yom Kippur War. So in August '72, oil was $2.59 a barrel.

It ended up being $11.65 — it went up 4.5-fold. The Iranian Revolution in 1979 that was another big oil shock. Oil started at $12.80, ended at $41 — it tripled. Look at Covid, Ukraine, and this. You have to scratch your head here and check this is actually right. But in Covid/Ukraine it was a bigger oil shock in percentage terms, because during the lockdown oil dipped down to $20 for spot deliveries.

The futures markets at that time actually were trading at negative prices. So there was no spare capacity in terms of storage. And if you were taking delivery of oil, it was very expensive to find somewhere to put it. So you got to $20 a barrel. And then after the invasion of Ukraine, you were at $120 — so it went up six-fold.

Another energy shock. And then we've got this Iran War. We started at about $60 in December; the highest in futures trading for Brent was $118. So that's a doubling so far. Not on the scale of Yom Kippur, the Iranian Revolution, or Covid/Ukraine. But you can certainly see that pattern developing — that this could turn out to be a bigger energy shock.

And we know that the physical markets are trading at much higher prices than these futures markets — the futures markets, because they're the future expectation, are sort of slightly assuming that things don't stay this bad. But if you're trying to take spot deliveries, we've seen prices of $150 or higher.

Inflation spikes are painful for balanced funds. So this diagram looks at a big sweep of history here — looks at the last 100 years or so. On the left-hand side, it looks at the returns from US stocks and bonds. If you're in the bottom left-hand corner, you've got falling stock and bond prices, which happened in 2022.

And on that basis, it looks like it's quite a rarity. Only four times have stocks and bonds in America fallen at the same time as each other in a calendar year. But if you adjust those dots for inflation — look at real returns — there are many times when stocks and bonds fall in real terms. And if you look at the dates, you've got the Yom Kippur War in there, you've got the Iranian Revolution in there, you've got Covid in there. Periods when you get an inflation spike are bad for bonds — kind of obviously — but they're also typically very bad for stocks, especially if there's a recession.

And commodities are going up. So when we look at multi-asset portfolios — either the governed range or our GMAP funds — I'm comparing here the growth portfolio to a sort of typical passive balanced fund. On the left-hand side, you can see a 60/40 fund with really big exposures to US equities, which are quite inflation-sensitive, and to bonds. Whereas our  portfolio's got a bit of balance with more in the UK — a more inflation-resilient, cheaper market.

We've got commercial property, which again is a long-term real asset. And we've got a hedge with commodities. So your first line of defence in this kind of shock is diversification including inflation hedges. That will help protect value in times when a 'Spikeflation' shock hits you. The second line of defence is to be tactical. And this is where the business cycle comes in.

And there's great uncertainty at the moment. We have a daily tactical meeting — we've just come out of it. We're all — as is everyone else — reading the latest pronouncements from the White House and from the Iranians and from the Israelis and trying to figure out what's going on before the shock happens. The investment clock that guides our asset allocation was in the top left-hand corner.

That yellow dot. You see the trail over the last 12 months or so — we were in the top left-hand corner, which is recovery and growth but inflation generally falling. We started the year thinking, actually, the earnings outlook was quite good because the economies were chugging along quite nicely. There were some improvements in business confidence, and central banks felt able to cut interest rates further.

There was lots of speculation about Fed rate cuts. Where are we going next? It's more uncertain, and you can see a bit of a projection there with the inflation rise taking you into overheat. If you've got a recession as well, we go into stagflation. So lots of debate about where we head next. Two scenarios for you.

With parallels again with history. One is Russia/Ukraine 2022 and the other is the Gulf War. When people are talking about three scenarios — just to be clear here — you can split these into as many as you like. But one of them is there's a deal, and it's possible. And if there is a deal and the war ends and you get, I guess, security guarantees for Iran that they believe, they're asking to keep their civil nuclear programme.

They're asking to keep defensive missiles — whatever defensive missiles are. And if the Americans get what they want — the Strait of Hormuz is reopened — and all the things that Iran has said don’t happen, then the markets clearly rally, oil prices go down. It's definitely possible. But it does feel a little bit at the moment that the two sides are very far apart.

And I think it's unlikely that there is a deal. So I'll leave you with two scenarios. One of them is the 'Trump goes home' scenario, which is being talked about. We don't need the oil from the Strait of Hormuz — Trump here is pretending oil is not a global market with global pricing.

Because if the Strait of Hormuz is messed up, it's going to continue to affect gasoline prices in America. But there is that scenario where Trump goes home — some kind of spectacular event, an attack — this weekend, and he says, "That's it, we're out of there. You clear it up." I think in that case, you might not get the oil price moving a lot higher, but you might not get it moving a lot lower either.

You continue to have disruptions and uncertainty. And what you can see on the left-hand graph there is 2022: the turquoise line is the oil price. And the oil price went up and it stayed high for about three or four months. And during that time, of course, it was inflationary. And stock markets shown in purple were declining. So I think you have that possible scenario, or you have something a bit more extreme where ground troops are involved, and that's more like the first Gulf War in 1990.

And stock markets dropped when Saddam Hussein invaded Kuwait in August of 1990, pretty much out of the blue. And you could argue the US-Israeli attack on Iran was pretty much out of the blue — we weren't talking about it three months ago — and then the markets only really recovered when the oil price came back down again, when the war was over. We could be going into something a bit more prolonged like that, where there's lots of volatility in both directions.

But generally markets remain depressed until it's clear that the war is over. The problem we have at the moment is we don't see as clear an ending to this as you had in 1990. There was a United Nations resolution. There was a United Nations coalition. And when Saddam Hussein was back over the border from Kuwait, back in Iraq, the war was called off.

We don't see that same kind of clear ending at the moment, but those are the sorts of scenarios we're talking about. In that scenario where ground troops go in, there's more collateral damage, more lashing out by the Iranian regime at energy infrastructure — possibly a much bigger spike in oil prices. Then you worry a little bit about whether you get a recession.

So if you look historically at these oil shocks — this is the oil price in real terms — you've got here again the '70s: Yom Kippur War, Iranian Revolution; you've got the 1990 Gulf War, the Iraq War; you've got the QE and China bubble, Ukraine invasion, and Iran. All of those — one, two, three, four, five, six prior oil shocks — five of them were recessions.

The only one that wasn't was the Covid reopening. And arguably that was quite a special case in terms of where cash balances were. I'm going to stop there — we've had quite a few questions coming through. We are going to answer some questions.

Yes, perfect. Thanks so much, Melanie and Trevor. The first question we will ask here is: do you think the Bank of England still need to continue to reduce rates to protect the economy, rather than talking about holding or raising?

Yes. In short, I think pre-crisis, I was expecting the Bank of England to cut rates a bit further. And once they are a bit less worried about inflation persistence risks, I think we'll come back to that. Interesting that the question is worded in terms of — or are you thinking about does the bank think need to sort of talk about holding or, or raising rates?

Do they think interest rates talk about that? It doesn't mean you can get markets to do some of the work for you. So you actually need to do less.

Perfect.

Yes. I mean, I sort of joke that central banks have got inflation targets, but they don't use them during price level shocks because it's so painful to create the recession to reverse the increase in prices. So I say it's like dieting between meals. So, the UK inflation level should be up, what, 12% since the pandemic, but it's up 30%.

And my worry is, if there is a big inflation shock again, central banks will give lip service to fighting inflation but they will have to think about the economy as well. And that's where you need to get protection against cost of living increases through things like commodities.

Great. And still looking at the government side of things, do you think that, with government debts high, will they bring in capital controls in the UK or around the world?

Melanie Baker

No, that doesn’t seem likely to me. But look, that said, there are things governments can do — for example, from a regulatory perspective perhaps — that can encourage people to hold government debt.

Melanie Baker

So there are other forms of it — generally what we call financial repression — that can be engaged in if they really want to go down that path. But that's not really my central case.

Perfect. And which scenario are you most planning for — 'Trump goes home' or 'troops on the ground'?

I always think you've got to hold more than one scenario in our heads at a time, right? I think we're looking really at what Trump is doing, not what he's saying. And what he's saying is partly trying to keep markets as positive as possible while they're trading. I think over the long weekend we're going to see some kind of military action.

So I think we're positioned slightly short risk. So we're slightly short commodities — short equities rather, but long commodities. We were very short government bonds at the start of the year; we're now neutral. So we think government bond yields have risen so much that in a kind of 'Trump goes home' scenario, bond yields probably drop a bit; in a 'Trump goes in hard' scenario...

...there's a recession and bond yields probably drop. So we're neutral bonds at the moment. But slightly overweight commodities, underweight stocks — which I suppose is probably somewhere between 'Trump goes home but leaves things messed up' and 'Trump goes in hard and it takes weeks'.

Perfect. And to what extent could geopolitical risk in West Asia drive structural shifts in equity markets? And does this strengthen the case for investing in global funds like the MSCI?

Yes, okay. Well, I think there are structural changes happening. I do think that when this war ends, people will then look back at the US policymaking, and they'll think about the US midterm elections in November. And I think personally it'll be a flight away from the dollar again, which means gold goes stronger. If the dollar's weak, it generally helps emerging markets.

And I think there's a general theme which I believe in — which people are calling the DM-ification of emerging markets and the EM-ification of developed markets. So America's behaving more like an emerging market; emerging markets are in better shape. I think there is a shift towards the EM.

Perfect. And how exposed do you think the markets are to repricing of front-end rate expectations, if cuts are delayed further?

If cuts are delayed further? I mean, I think the question at the moment is will there be hikes, really. So I think a lot of that is now factored in. Obviously, I suppose, in that middle scenario — or the first scenario — the 'Trump goes home but leaves Hormuz mostly messed up' — that's the scenario probably with the most upside for bond yields, because it's inflationary but without an obvious end to it. But I think we're pretty neutral in terms of pricing. We think it's about right.

Perfect. And last question here: how vulnerable are equity valuations if rates stay higher for longer, particularly in parts of the market where earnings expectations remain ambitious — i.e. US tech?

Yes, right. So if we weren't talking about Iran we'd be talking about AI. The US stock market is trading on 40 times its cycle-adjusted earnings. The UK is on 20 times — so the UK is cheaper. It's the buy-one-get-one-free stock market. American equities are vulnerable just because they're expensive. And if at the same time you've got question marks about policy and you've got higher-for-longer interest rates, I think that makes them more vulnerable.

I've often been saying that feels a little bit like in the short term there could be dot-com bubble kind of dynamics around AI — in other words, the internet's a great thing, it's still all around us, but the stocks get too expensive. But I couldn't see what would burst the bubble. You needed higher rates, and this is what could give you higher rates.

So yes, I'd be a little bit nervous about US equities. And we saw the software companies getting hammered even before the Iran War came through. So a little bit nervous about the US generally.

Perfect. Well, thank you so much, Trevor and Melanie. We should wrap up there — keeping to 30 minutes. If we didn't get to your questions today, one of our sales team that you can see on the screen, reach out. Any other queries or questions, please don't hesitate to get in touch with us. And thank you all very much for joining us today.

Thanks, everyone.

Good afternoon, everyone, and welcome to our latest quarterly webinar. My name is Tom Cole and I'm a national account manager at Royal London Asset Management. And I'm delighted to have been joined by Trevor Greetham, head of multi-asset at Royal London. So today the plan is to take you through recent market developments and how this is impacting our thinking and what we're doing in the portfolios here.

It has been quite an extraordinary period. We're seeing high levels of uncertainty. But markets are at all-time highs and they're powering through at the moment. So this should be a really useful session. We are keen to keep it as interactive as possible. So please post any questions and we will get to these at the end. So with that I will pass over to Trevor.

Great. Thanks, Tom. Thanks everyone for connecting. We called this presentation 1970s Revisited. And as we go through I think it will become obvious what we're talking about. We're talking about oil shocks and inflation and geopolitical volatility. We all say there's no such thing as passive in multi-asset. Your first line of defence against uncertainty is diversification. So we build portfolios that of course have a large allocation to equities as a growth engine.

But we also have commercial property in there as an alternative way of seeking long-term growth. We have fixed income holdings diversified around the world, of course different types of credit. And we're the UK's largest commodity investor. We have commodities in the mix and the commodities particularly have really benefited the funds so far this year, especially when you were seeing falling stock prices at the same time you were seeing rising commodity prices — and the bounce back in equities that Tom mentioned hasn't seen commodities sell off.

They're still doing pretty well. The financial markets are contending with what is a kind of 1970s-style situation — a Middle East energy crisis, which looks like it's going to raise inflation. And you can see the investment clock on the right-hand side of your screen — we'll come back to that. But that's nudging into the strong growth, rising inflation overheat quadrant.

But obviously the Middle East crisis could in theory trigger a recession as well. If prices go high enough, we de-risk equity exposure. In early March when the US-Israeli bombing started, we moved back to a modest overweight after the ceasefire announcement. But we've trimmed that a little bit recently, a little bit nervous that we could see a kind of W-shape in markets.

If the blockade that's currently in place for the Strait of Hormuz means energy prices go higher and recession fears start to rise, so it's a bit of a barbell. We're overweight equities, especially emerging market equities and tech where the earnings growth has been strongest. But we're also overweight the energy sector and also overweight commodities. We are watching the clock — the investment clock.

It's in that sort of overheat quadrant. If there were a significant worsening in the situation it could move into stagflation. We need to be more defensive then. If the war were to end and oil prices were to drop, we could move back into that equity-friendly top left-hand corner, so we could go in either direction. And that's part of the barbell strategy.

If we're long equities and commodities in the overheat, they should both be doing well. If the war ends with the war intensifies, one will do well, the other won't do well, and they should be hedging each other a little bit. So we have portfolios aiming to meet customer needs for accumulation and de-accumulation. You've got on the screen here the Governed Portfolios and their equivalent GMAP funds on third-party platforms.

The Governed Portfolios launched back in 2009, the GMAP launched in 2016. And you can see in the top right-hand corner of your screen some data here from FE Analytics, just showing you a mid-range GP and a mid-range GMAP. So you've got the GP Conservative and the GMAP Balanced, and you can see that they're very consistent in performance with each other and also pretty good risk-adjusted returns.

So no big setbacks.

Performance versus peer groups has been improving this year, with the commodity benefit and the strategic mix helping. Performance was lagging over the intervening periods of two or three years back, mainly because when you get these sharp moves up in equity markets, funds that are less diversified will do better. So we're more sort of tortoise than hare. We're sort of trying to be more diversified.

And when the volatility picks up, we're generally ahead. And if you look at those five-year numbers versus the GMAP, peer groups were first or second quartile. And over those longer periods, Governed Portfolios are also showing good performance versus their benchmarks over those longer periods. As you always say. Well, the multi-asset funds managed here are active on all levels.

So we have an active approach to strategic asset allocation. We're trying to maximise return for a given level of risk. But we're factoring in valuations and emerging threats. We build each asset class primarily using active Royal London building blocks to seek additional return or improve ESG outcomes like carbon. And we have a daily tactical asset allocation overlay that seeks to add additional return irrespective of market backdrop.

If you start with the strategic asset mix, if you just have stocks and bonds, there isn't really much of a job to do here. You dial up the equities, you dial down the bonds until you hit your risk bucket, and then you stop. And if you've got the number of asset classes we've got, there are many, many different ways to get the same level of long-run volatility.

So we have a process which is typically roughly annual where we'll go through and adjust the asset allocation, either to include new capabilities to improve diversification or to reflect valuation shifts. And we're expecting to make the next changes in the next few months, which we can update you on later. Usually incremental broad diversification has been beneficial. You can see commodities in particular coming into their own in 2021, 2022. So two years in a row there of almost 30% sterling returns.

And where we sit at the moment, 26.9% year to date, which is not bad going. So again, the commodities have really been beneficial in offsetting some of the weakness in other asset classes. So we started talking in 2021 about something we call 'Spikeflation'. So in 2020, in the lockdowns, we were saying that our approach would be more broadly diversified and that including inflation hedges like commodities would be beneficial because we were expecting an inflationary post-Covid recovery.

And then in 2021, 2022, we started to broaden that out and say, actually, there are lots of changes in the world that make us think we're in one of these regimes where we're more vulnerable to inflation shocks. So let me explain what I mean by those regimes. First of all, on the left-hand side of your screen, it just looks at US and UK consumer price inflation since 1900.

And you can see that a lot of the time inflation is quite low — low single digits, pretty steady. And in particular most of the last 40 years have been like that. So really from 1980 to 2020, very low, very stable inflation. And over time more and more central banks getting an independent mandate to target inflation and keep it low.

Well, if you've got central banks targeting inflation and keeping it low, what happened then in 2021/22 — we know it was the Covid policies, massive fiscal and monetary stimulus into a supply-constrained economy. We know it was the invasion of Ukraine. And here we are, sort of four years on from that inflation spike subsiding. We've got another one, this time based around geopolitics in the Middle East.

And if you look at the behaviour of inflation in the past when it's been high, it's been spiky. So the 1970s had those two big inflation spikes. We had three inflation spikes around World War Two and a very big inflation shock around World War One. And we think we're back into one of these periods where you've got 1970s-style vulnerability to inflation. On the right-hand side of your screen, we've got the drivers of the new regime. And some of this is to do with commodity underinvestment — not just because of net zero. That's a transition story, but net zero does mean that there's less investment going into fossil fuel capacity. And at the same time, there's not enough investment going into things like copper, which you need for the electrification to replace fossil fuels.

But that underinvestment is also about the fact that commodity prices have been quite low for the last ten, twenty years and therefore there hasn't been much cash to make investments with. So we're now in a positive commodity supercycle. And of course, the Iran war has destroyed a lot of commodity capacity in the Gulf region, particularly in fossil fuels.

Deglobalisation, trade wars, onshoring — that's still very much with us. In that category you could include Brexit. You could include the tariffs, the break-up of NAFTA. We've just heard that OPEC is fracturing a little bit. UAE is coming out of OPEC. Anything kind of international cooperation-based seems to be breaking down. You've got structural changes to labour markets, massive public spending programmes and populism.

And I think actually social media has a role to play here because I think social media has really polarised people. And if you're an incumbent political party in government, everyone's shouting at you to spend more money on something, and generally that involves inflation in the end. And then heightened geopolitical risk and rearmament. I've been to a couple of conferences recently where people are saying, what if NATO breaks down?

Does Europe need to have its own nuclear deterrent? Europe is now outproducing ammunition compared to Russia. So Germany's ramped up ammunition production very quickly. But all of this is investment in stuff, and stuff pushes commodities higher and can push inflation higher. And over and above all of this — number seven on the dial — there are high levels of debt.

When government debt is as high as it is, often the way that things get normalised is through inflation. And the central banks have said they'd give you 2% inflation every year since 2020. So two times six years is about 12% inflation. They've given you 25 to 35% inflation. And we think whenever these shocks come along they are again going to effectively not raise interest rates to offset them, as you would perhaps expect them to.

So you can see the comparison with the '70s in particular on the next slide. So on the left-hand side we've got US CPI and on the right-hand side you've got UK CPI. And the dates along the bottom of those diagrams are 1970s dates. But I've got the recent inflation experience shifted to align the June '22 peak with the December '74 peak.

So you've had the first of your 1970s-style inflation shocks. And right on cue, you've got a second one coming along. Interestingly, the second inflation shock in the 1970s was Iranian — it was the Iranian Islamic revolution. Again, we've got an Iran-focused inflation shock coming on right now. As for going to air on this webinar, the latest from the White House is that Donald Trump is considering an unlimited embargo of Iranian oil in the Strait of Hormuz.

It's a bizarre situation, because it's actually true that America and Iran are cooperating militarily to block the Strait of Hormuz. Iran is obviously threatening shipping. America is saying, well, if anything gets through, we're going to we're going to stop it to

They're actually hurting, if anything, China and Europe. And China and Japan in Asia have got massive fossil fuel strategic reserves. They're really quite well prepared for this. So actually it's the US, the UK and Europe that are really probably affected more than almost anybody by this embargo. And it could result in much higher inflation.

And if you think I'm exaggerating — if you think in the 1970s the inflation moves were so much bigger because the price moves were so much bigger — let's look at a few of the numbers in the table. So I've got there the Yom Kippur War of '72. I've got the Iranian Revolution starting from '78, and the oil price in '72 to '74 rose from $2.59 a barrel to $11.65.

So it went up 4.5 times. In the Iranian Revolution, the oil price went from $12.80 to $41. It went up 3.2 times. Okay, now let's look at the recent period — the Covid/Ukraine crisis. The oil price in April 2020 was $20 — $20.46. It got to $123 in June of '22. It went up sixfold. It was a far bigger rise in prices than we'd seen in either of the two shocks of the 1970s.

So far, the Iran war — we've gone from about $58 to the high so far of $119. It's about a doubling. But a lot of people are saying that the amount of crude that's either locked in or being switched off, and the amount of damage done, it's actually a bigger outage of fossil fuels than the two 1970s crises combined.

And it's not over yet. And if you look at the oil prices for immediate delivery rather than the futures prices, they're not $105 or whatever, they're $150. So there's a lot of risk here that actually energy prices will rise quite significantly further. Commodities give you a good diversification against commodity shocks. And in particular commodities are a great diversifier for bonds.

On the left-hand side, you've got the correlation between commodities and global equities, which is usually slightly positive, negative during a geopolitical shock like we've just seen. So stocks went down, commodities went up. With bonds the correlation was generally negative. You think about it — the opposite corners of the investment clock. You know, commodities are the inflation corner and bonds are the deflation corner.

And as you'd expect, commodity returns are better when inflation is rising. So having the strategic exposure to commodities is really beneficial if you think 'Spikeflation' is a thing. Diversifying equities into property is also beneficial. So property is just a different way of generating long-term growth. And people are quite surprised by this slide because it shows that most of the time since 1987, UK commercial property has more or less kept pace with equities.

People think of property as a halfway position between bonds and stocks, but its return has been more like stocks. So the orange line is what used to be called the Investment Properties Data Bank index — it's now the MSCI UK Commercial Property Index. It includes rents reinvested. The purple line is UK equities with dividends reinvested and the turquoise line is global equities with dividends reinvested.

And if you stopped this clock in 2008, property was ahead. If you looked at it again in 2015, property was ahead. If you look at it on the day before Liz Truss's mini-budget, property was ahead. And the last couple of years, again, I mentioned earlier on when our funds were lagging the peer groups a little bit.

This diversification into property was a bit of a drag on performance. Equities went up very strongly, but you can see it's a great, differentiated driver of long-term growth, well above inflation. The green line shows the price level — so well above inflation. And there are some times when stocks crash because of a valuation-driven bear market — the obvious example being the dot-com crash in 2000 to 2003 — when UK and global stocks go down.

But property keeps going up. And if the AI boom/bubble bursts in the next few years, you might see a similar thing where property just keeps going up while things are expensive in the equity world. If you look at US equities, they've come off their highs a little bit, but the valuation level is close to 40 times cycle-adjusted earnings.

That's double the valuation of the UK market. So I still like to call the UK the buy-one-get-one-free stock market. And when you're buying equities at a very expensive valuation level — 40 times earnings — if you look at the scatterplot on the right-hand side, your ten-year future return is generally quite low. Now you know US equities are quite high beta.

They'll go up fast. They'll go down fast. But the same was true in '99/'2000. And over the next 18 years you didn't really make any money. There were booms and busts, booms and busts. And it was like a big roller coaster. So in the short term — this is not a short-term chart — US equities could keep doing really well, but we think strategically it's good to aim off a little bit.

They've got a bit too big at the moment. US equities are 70 to 80% of the world index. Just as a reminder, in 1990 Japanese equities were more than half of the world index. And they're not anymore. So high valuations don't always mean strong returns — quite the opposite. So wrapping all of this strategic bit of the conversation up, then I'll get onto some tactical positioning.

The big differentiating factors of the Royal London portfolios are the greater diversification and inflation resilience. So the real assets like property and commodities, the diversification of equity exposure on value grounds — so tilted away from US equities towards the UK and emerging. And then diversification of fixed income exposures with quite a large range of different asset classes, including European asset-backed securities.

A picture tells a thousand words. On the left-hand side I've got a sort of straw-man passive balanced fund — 60/40 equities and bonds. When equities and bonds are doing really well, that will do really well. But the more diversified mix you get from Royal London — the Governed Portfolios or GMAP Growth — you can see a bit less in North America.

So £25 of your £100, not £42 of your £100. Got a bit more in UK equities — £13.70 of £100, not £2.20. You're not going to get coffee downstairs for £2.20. You've got less in equities overall because you've got £11.30 in property, you've got £5 in commodities and you've got a bit less exposure to bond markets. So we like that kind of greater diversification story.

All of the asset classes are implemented — with the exception of commodities — through internal Royal London funds, a mixture of carbon tilts and actively managed funds and lots of award-winning funds in the roster. And then their managed on a day-to-day basis with tactical asset allocation, where I and the rest of my team will review back-tested models and factors like the investment clock, and decide whether we want to make adjustments in the funds.

Although there's about £100 billion sterling in multi-asset funds that we're managing on this basis, because we're using futures and forwards to implement it, it's very liquid and low-cost tactical asset allocation. The strategies we use are simulated back to the early 1990s. So this graph looks at the current suite of models simulated back to the early 1990s. And the main sort of picture here to take in is that we're trying to come up with models that won't always be right, but will be right more often than wrong.

And we're trying to have a balanced risk. So we're not just about are we long or short equities. We've got in here cross-asset positions balanced by currencies, regions, sectors, types of credit, active commodity positions and gold.

The investment clock is the one that's most interesting at the moment, because it's really kind of influenced by the Middle East war. And this is the way we look at growth and inflation cycles and figure out which asset classes should be doing well based on the strength of growth and the direction of inflation. And we started off this year in the top left-hand corner in recovery, where stocks tend to do well.

We're nudging into the top right-hand corner where commodities tend to do well. And if you look at the blue circled parts in that table below, which looks at the returns through these different cycles back to the 1970s, commodities tend to be your best asset class in overheat and stagflation. And that's where it feels like we're heading. You can see this on the diagram here.

The different dots on the clock — there are monthly prints over the last 12 months. And the yellow circle is the current monthly reading. And this is quantitative. So we're looking at a range of different global economic indicators for growth and for inflation. And the strength of growth determines the up-down direction on the screen.

Inflation is left to right. So you can see actually the growth picture is okay — it's above the horizontal, not brilliant. And if anything it's going down a bit, and to the right as inflation pressures rise — this is something we'll have to keep a close eye on. Investor sentiment has recovered quite a bit from Easter. But remember, at Easter, on Easter Sunday, Trump was tweeting about destroying Iranian civilisation and all this kind of thing.

It's a pretty extreme moment. And he didn't do that. People were saying Trump always chickens out. Trump backtracked and introduced a kind of ceasefire, which has been a pretty iffy kind of ceasefire, particularly in Lebanon, but is a ceasefire. And the markets have bounced back because the earnings numbers have come in strong. The oil price is not high enough to derail the US economy.

And there's a belief at the moment that there's less likely to be further damage to Gulf oil infrastructure. But I think this is a pretty fragile recovery. So sometimes when you see these V-shaped recoveries, there's been some kind of policy shift, which means that your worst fears are no longer valid. And I don't know if we've had a very clear policy shift here.

And in the same way that Donald Trump does tend to chicken out — or, if you like, backtrack on more extreme positions — when the markets are at their lows, he feels re-energised when the markets are at their highs. So he's tweeting about the S&P and the Nasdaq being at new highs and saying things like "trust Trump", you know, and then sort of tweeting something last night of him in sort of shades with a machine gun, sort of laying waste to the Middle East. I think he'll do something again in the Middle East.

A lot of the time you have to watch what's happening rather than listen to what's being said. And what's happening is there are now three aircraft carrier battle groups in the Middle East. The first time that's been the case from America since 2003 — that was the ground invasion of Iraq. So yes, it's possible there's a ceasefire that sticks — that would be nice — as the oil price actually came down and Iran and America stopped blockading oil from the rest of the world.

But there's still a bit of risk here. I think that things go awry again. So at the moment we're positioned for a kind of continuation — even though it seems unlikely to continue forever. We're positioned for a continuation of upward pressure on commodity prices, but stocks actually reflecting some of the earnings growth. But we're ready to move in either direction if needs be.

If you want to know how many tankers are going through the Strait of Hormuz — not many still. So the top of your screen looks at the ship tracking data. Still almost no traffic going through the Strait of Hormuz. The bottom of the screen is the crude oil price.

What if the oil price goes a lot higher? Then you could see a recession. This graph looks at the oil price since 1970, put in real terms here. So it's the real oil price. And you can see the various spikes in oil — I've labelled most of them. The shaded bars on the screen are US recessions. And so if you run through these previous shocks, the Yom Kippur War — we talked about '73/'74 — was a US recession.

The Iranian Revolution of '78/'79 resulted in a double-dip recession. The Gulf War of 1990 pushed the world into a brief recession. The Iraq War of 2003 — there was a brief period of recession there. It was beginning to happen anyway, actually in America, because of the dot-com crash. Ahead of the Lehman failure, there was a big run-up in energy prices and that also resulted in a recession.

So in a sense, inflation and higher interest rates burst a credit bubble. And then we've got the Ukraine invasion, I've labelled, which didn't actually give you a US recession, although we got a recession here. And the reason I think the Ukraine invasion, even though it was a sixfold increase in prices from the low there — the reason that didn't create a recession was because it was a really weird time where during the Covid lockdowns, there had been a massive rebuilding of cash reserves by corporates and consumers — spending a lot less money in lockdown and getting lots of government handouts — that actually allowed the cash pile to kind of prevent there being a recession.

But this is quite serious stuff. And if you want to trigger a global recession, stopping the supply of oil from the Middle East is a very good way to do it. If things do normalise, if we get back to normal, lower oil prices and things resolve positively for stocks, then the earnings backdrop is still pretty good.

This looks at the global growth scorecard — that's one of the ways that we power the investment clock. And in purple it shows you company analysts' revisions, which have been revising up, not down. And of course where we're seeing most of the earnings numbers come through is still quite tech-related. And it's the US and emerging markets primarily. Korea actually is another big tech play which has been doing the bouncing back.

The momentum of the UK and European markets is a bit more iffy. We come back to tech and the question becomes: that 40 times earnings from US equities — is artificial intelligence a boom that will go on for much, much longer and make people much more money in terms of the stock market, or is it a bubble? And I like to quote Mike Fox, the head of equities here, who often says that the technology is often over-anticipated in the short term but underappreciated in the long term.

And you get these periods where markets basically expect too much and they want it now and the valuations get too high. And in ten, twenty years' time, AI will be everywhere. But you might not have made money in the stocks in the meantime. This chart is something I started putting together when I worked at an American investment bank in the early 1990s, and it really categorises all of the different bubbles I've experienced in my investing career.

The first one there being Japanese equities in purple that burst in 1990, the next one being the Asian Tigers. This is Thailand. The orange one is dot-coms — the technology sector going up and back down again. And we've got the mining sector in green. That was a bubble around the time of the financial crisis caused by China's building of cities.

The pale blue one is a bit of an odd one out because it's actually UK index-linked gilts. The other ones are all a sector or a region versus the world. That's just the absolute price of UK index-linked gilts. There was a bond bubble that was burst coming out of Covid by the start of 'Spikeflation'. And then the maroon-coloured line at the end there is MAG Seven.

They're all rebased to 100 when the bubble burst. I don't know if this is the bursting of the bubble or not, but I just think things are getting really quite expensive and we've got exposure of course to US equities and to MAG Seven. We're currently tactically slightly overweight technology and slightly overweight in the US. We just think, balance it out.

Don't get too greedy. One thing that makes me think that the bubble isn't ending — if it is a bubble — immediately, is the Fed. Fed funds interest rates have been going down, not up. So this graph looks at Fed funds in purple, looks at the US stock market — the S&P 500 — in turquoise. It goes all the way back to the early '70s.

So, you know, keeping true to the back-to-the-'70s title for the webinar. Another long-term chart. And you can see that the most recent changes in Fed funds have been rate cuts, not rate hikes. Now you might sort of say, well, if we get inflation coming back, then interest rates will go up again. And that could burst the bubble.

That's true.

But you've also got a change of guard at the Federal Reserve. And you've got Kevin Warsh in the process of being appointed as the new Fed chair. And his big thing, apart from being quite closely connected to Trump through his father, who was Trump's roommate at university — so there's a bit of a suspicion around how independent he'll be.

But his big intellectual theme at the moment is to say that AI will be deflationary. So he's not going to be the guy hammering the table at the Fed saying raise rates, because he's saying AI is going to be deflationary. So I think if anything, there'd be more juice coming into the stock market. So wrapping up where we are — I'm sort of hedging my bets — long stocks and long commodities being the main position.

We are underweight the dollar. Regionally we're overweight the US, as mentioned, and emerging markets. We also like Japanese equities. European equities seem to be the loser here — in the kind of peace, they don't have enough tech in them. In the war, they're too energy-focussed in terms of imports. And then we're overweight technology sectors versus defensives within the sector mix.

Quick rattle through. Appreciate your time and I think we're ready to look at some of the questions.

So the first one I think has come through on—

You go for it.

Yeah. Recently the deputy governor of the Bank of England said the global stock markets were overvalued and set to fall. This is a very unusual thing for someone in that position to say. What do we think in terms of that? Central banks often talk about stock market crashes. They don't talk about stock market booms very much, because the sort of context of that comment — that stock markets were high and could fall — there's almost a kind of financial stability point.

You know, the Bank of England from time to time does stress tests on the banks. And they say things like, how would the bank balance sheets work out if interest rates went up and the stock market fell 20%? Sometimes the media latches onto that and says Bank of England says stock market to fall 20%. I think this is a similar kind of thing.

And she makes a good point. You know, the markets are expensive and there is some downside risk. And she's just saying mind your eye. But it's more from the point of view of someone whose job is not to warn you about good times.

Great. Thanks. We've had some other questions come in. So we've got some important meetings this week as well. So we've got the ECB and the Bank of England meeting. Do you have any predictions for these and what the sort of output could mean for the wider economy?

Well, what you're going to see with central bank meetings is a bit of a tussling of the conscience, because just like investors, the central banks don't know whether what we're seeing in terms of oil prices will be sustained or not. And then they've got a two-way pull. On the one hand, they would like to raise interest rates to fight inflation.

On the other hand, they're worried that higher energy prices will cause an economic slowdown anyway, and that might make them want to lower interest rates. And I think at these times they end up sitting on their hands and doing nothing. And I do think if this ends up being a big inflation shock, that sort of dichotomy between should they raise rates or cut rates will just carry on getting bigger and bigger, and they'll carry on doing nothing.

And I think, in effect, what may end up happening is that they end up raising rates, but not enough to squeeze the inflation out. That's exactly what happened in all these other spike examples, where the central bank says, oh well, there is an inflation shock, but it's transitory. We don't really want to raise rates because that might cause a recession.

And so we're just going to wait and see. And that's how the inflation happens.

Thanks Trevor. And then in terms of other geopolitical events on the horizon, we've got Trump meeting Xi next month. What do we expect from this and how is this going to have a broader impact potentially?

Yeah, I think there's one way of looking at what's going on with the Middle East, which is almost like a power politics game between China and America. So China's got rare earth metals, which America needs for technology and has been talking about restricting exports. And America's going, well, you know, we're a net energy exporter — how do you feel if we block the Strait of Hormuz?

So I think there'll be a lot of sort of power play going on in that meeting. China wants the Strait of Hormuz to be reopened, but they've got such big strategic reserves, as I mentioned, that they're actually offering to give airline jet fuel to Asian neighbours from their reserves. So they're actually saying we're quite relaxed about this. So you kind of wonder — in this whole kind of siege that's going on — Trump's expecting the Iranian regime to sort of collapse and back down.

But for them it's a survival question. China's got lots of oil reserves. So China's not about to put much pressure on. And it's really just — you know — the area that's being really pressurised is Europe. So yeah, I think Trump would quite like to have solved the Middle East crisis, in his words, by the time he meets Xi. But I don't see it happening.

Okay.

Just a question on gold. Your views on gold as an asset class now, Trevor. I think we've held that in the portfolios over time. It's done really well for us. And how do we see that asset class?

Yeah. Last year our position that we held tactically in gold — in some of the funds — was the best-performing tactical call we made, because there's been lots of whipsawing of markets, which is not great for active managers. So last year around the tariffs, this year around the Iran war, generally active management struggles a little bit with these sudden reversals — both the drop and then the sudden bounce back.

But what's been happening through last year is throughout all of that, gold was doing well. So in the Governed Portfolios, 20 to 30% of the commodity exposure is typically precious metals. Those benefit there. In the GMAP we had additional gold ETF positions as well. In January, gold went crazy. It suddenly rose very rapidly. And we sold a good chunk of the tactical gold at that point, and most of the rest of it thereafter.

Gold to us is a hedge against US policy scaring away foreign central banks basically from holding dollars. So we think it's a useful thing to have at the ready between now and the midterm elections in November, where I think domestic political pressures are going to build quite significantly. Trump's also talking about going after Cuba. Greenland might still be on the agenda.

You know, there's a lot of stuff that can happen between now and November that will generally make foreign central banks feel they should move money away. But this year when equities sold off, gold sold off as well. And that's something we've seen before — that gold can get sucked into a kind of de-risking trade. And some central banks — there's been discussion that some of the Gulf central banks or Poland may actually be decreasing their gold reserves to sort of spend money on reconstruction or armaments.

And so I think it's a bit on pause at the moment. So in the funds that do have the flexibility to own the gold ETF, they don't really have much of it at the moment. I think if the Middle East situation ends and we have peace, then I'm very likely to buy the gold back again.

I think we've got time just for one more question. So we've got one here on the fixed income portion of the funds. How is that part of the portfolio playing a role in sort of dampening the volatility? And what are the opportunities we're seeing in that space?

Yeah, it's a really interesting question because from a strategic asset allocation point of view, in the periods with low, stable inflation, stocks and bonds were generally negatively correlated. So whenever stocks were dipping it was because of a deflationary problem. And government bonds were going up. So balanced funds had a natural shock absorber by owning bonds.

Because the things that cause trouble for equities were usually deflationary. And the government bonds would be doing well. If you're in an environment where what causes problems for equities is inflationary, it's also trouble for bonds. And so at the moment, I think the regime that we're in says you need bonds and you need commodities to hedge your equity risk.

Within the bonds you want to have broad diversification and you want to reflect valuation again, as we do with equities. And the spreads on high-yield bonds, particularly in the US, have become extremely tight. There's a lot of concern around some of the hyperscalers' private debt involvement in the US. So Jamie Dimon at JP Morgan is saying he thinks that private debt in America has gone too far.

So part of what we've been doing as well is diversifying that high-yield exposure into things like European asset-backed securities and emerging market corporates. So, you know, diversify your credit and diversify your bonds by increasing commodities as well.

Great, thanks very much Trevor. So I think we'll wrap it up there. And thanks very much for dialling in, everyone. We do really appreciate your support. If you do have any additional questions, please reach out to your relationship manager at Royal London. Have a great rest of the day and look forward to seeing you on the next update.

Thanks everyone!

The multi-asset funds we manage are modestly overweight in equities, especially emerging market equities. But they're also overweight in commodities as a hedge against further geopolitical stress.

The first line of defence against geopolitical uncertainty is diversification, and our multi-asset portfolios include a wide range of different global equity exposures, global fixed income exposures, commercial property and commodities. And the commodities in particular have been really useful this year, with the war in the Middle East pushing energy prices significantly higher.

If you think about the global business cycle, the investment clock that guides our asset allocation at the beginning of the year was in disinflationary recovery. So growth was looking like it was holding up or picking up in some parts of the world, inflation was generally quite low, and the expectation at Christmas time was we would be seeing interest rate cuts from a wide range of central banks, including the Bank of England.

Fast forward now to May, and we've seen this 70/80% rise in commodity prices, some of them. Inflation pressures are back and people are talking about rate rises. What that means is the investment clock is starting to move clockwise from the disinflationary recovery phase around to the inflationary overheat phase, and that is the phase of the business cycle when you would typically expect central banks to be raising interest rates. So bond markets are struggling. Commodities are going up. But stocks have also bounced back from the initial sell-off on the war.

And you could have a situation where the blockage in the Strait of Hormuz keeps energy prices high, but not enough, really, to damage the world economy too much. Interest rate pressure is starting to build, but so are corporate earnings numbers, and stocks could continue to go up. And US equities, emerging market equities and the tech sector and the areas generating the strongest earnings growth, and those are the areas that are seeing the strongest bounce back.

We do have to hedge ourselves a little bit here though, because the war is unpredictable. There'll be periods when it looks like there's a ceasefire and the Strait is opening, and there could be periods where things get worse and energy shortages intensify, and it's possible that the investment clock will move around from overheat to stagflation. So it's possible that you get a situation where energy prices are so high that you start to see a global slowdown and fears of a global recession.

So coming back to our strategy, we want to make sure that we're flexible. If you look at the number of tankers actually going through the Strait of Hormuz, as of the time of recording, the numbers were still really, really tiny. And there's still an open-ended blockade going on with Iran and America jointly actually blocking the straits.

Where we're positioned, we're overweight equities to reflect the earnings recovery. And if you like the muddle-through scenario of staying in a moderate overheat, we've got the commodity exposure in there as well, because that moderate overheat scenario would include commodity prices outside energy starting to rise in reflection to high energy prices.

But it's also a bit of a barbell strategy by being long equities and long commodities. If you were to see a situation where suddenly there were a sustainable peace, the equities would go up, possibly the commodities would go down. If you were to see a more prolonged war, then the risk of recession would see the equities go down, but the commodities go up. So there's a degree of hedging. The base case is a muddle-through. But as usual, diversification is the first defence against this kind of volatility.

The inclusion of commodities has proven itself again the second time in the last five years to be really beneficial. And we're watching the cycle very closely.