Lukasz:
Hello, my name is Lukasz de Pourbaix. I'm Head of Strategic Sales and Solutions at Fidelity. It’s been a tumultuous period in markets recently, with headlines dominated by what’s happening in the Middle East—particularly in Iran—and the impact on energy and markets more broadly. It feels like day to day, markets are being driven by headlines and tweets, so it’s a very opportune time to dissect what’s going on.
I’m pleased to be joined by Matt Quaife, our Global Head of Multi-Asset Solutions. Matt covers a lot of ground across the macroeconomic environment, managing a large pool of assets across multi-asset strategies. So welcome, Matt.
Matthew Quaife:
Very nice to be with you.
Lukasz:
Matt, it has been a tumultuous period in markets. If we step back to the early stages of the current conflict in Iran, what were your initial thoughts? When you opened your screens and saw markets down and oil prices jumping, what stood out?
Matthew Quaife:
With situations like this, you always try to take a step back and stay calm. We’ve been through many of these periods before, and the behavioural side of investing can be damaging if you panic.
So it was about assessing both the fundamental facts on the ground and the technical backdrop. In some ways, we were relatively fortunate with timing. That might sound strange, but we were coming off winter, when demand for gas is higher, and stockpiles were relatively strong in many regions, particularly in China. We were also entering this period with decent global growth momentum and falling inflation. So the backdrop wasn’t too bad when the shock hit.
What likely amplified the initial market reaction was positioning. There had been strong bullish sentiment earlier in the year, and many popular trades were crowded. Those positions got hit hard. Gold, for example, sold off sharply despite being seen as defensive. Markets like Korea and Japan were affected, and many investors were short the dollar, which then rallied strongly.
Interestingly, Bitcoin—already down significantly and out of favour—behaved relatively well, showing low volatility and rising during this period. So technical factors played a big role in price movements.
For us, it was about analysing these reactions and identifying where markets may have overreacted, and where risk-reward looked more attractive.
Lukasz:
Reflecting on what was essentially an energy-led shock, many of us were quickly revisiting maps and learning about the Strait of Hormuz. From a portfolio perspective, how did you approach this? Did you make changes, or were you comfortable with your positioning?
Matthew Quaife:
We did reduce some risk and raised cash relatively early on, mainly as a response to correlations rather than a directional market view. We then added that risk back fairly quickly.
Historically, most oil-related conflicts over the past 50 years have seen markets recover within six months, and we’ve seen something similar this time. So it’s important to keep that in mind.
With the current US administration, there’s also a tendency for policy to shift quickly, and there’s limited tolerance for deep market impacts—especially in bond markets, where funding costs would rise.
The complication here is that it takes more than one party to resolve the situation. But the key issue initially was correlations. Bonds, equities, and gold were all selling off at the same time, leaving very few places to hide.
As we approached our risk limits, we reduced exposure or relied on options to manage risk. We then waited and began adding risk back in early April, given the historical recovery patterns and the supportive macro backdrop. It’s been a rocky ride, but broadly in line with expectations.
Lukasz:
That point on diversification is interesting. Traditionally, bonds act as a hedge against equities, but we haven’t seen that recently. Correlations have turned positive, and even gold hasn’t behaved as expected. In that environment, where do you find diversification? And is this a structural shift or just cyclical?
Matthew Quaife:
I do think there’s a structural shift. If you look at bond-equity correlations going back to the 1800s, they’ve actually spent more time in positive territory than negative. The period since the mid-1980s, where correlations were consistently negative, is the outlier.
A simple way to think about it is this: when inflation is more volatile than growth, bonds and equities tend to be positively correlated. When growth is more volatile and inflation is stable, they tend to be negatively correlated.
Since the 1980s, we’ve had a stable, low-inflation environment driven by globalisation and economic expansion. Now, we’re moving into a world with more volatile inflation—driven by de-globalisation, political factors, and supply-side issues like energy.
Over the next five to ten years, I’d expect that volatility in inflation to persist. That means we can’t rely on the same diversification assumptions as before. Many models rely on data from the past 30 years, which isn’t representative of longer-term trends.
So what do you do? There isn’t a single replacement for bonds. You need broader diversification: contrarian value strategies, high-quality equities, dynamic options strategies, and potentially liquid alternatives. You also need to accept slightly higher drawdowns and take a longer-term view.
There’s no silver bullet—you need a combination of approaches.
Lukasz:
It feels like diversification has become both more important and more complex. Despite all the volatility and headlines, markets—particularly the US—have remained strong, with tech continuing to lead. How do you explain that?
Matthew Quaife:
Earnings—and the strength of the cycle. Much of what we’re seeing is consistent with the conditions heading into the conflict.
One unique feature of this cycle is that it’s investment-led rather than consumer-led. The main growth engine in the US is investment in AI and the infrastructure supporting it. That’s a significant shift.
We could end the year with weaker employment but stronger overall growth, driven by capital expenditure. That creates a divergence between capex and employment.
In that environment, we prefer exposure to real assets—like electrification and infrastructure—over consumer discretionary sectors.
Lukasz:
That’s a good segue into regions. Performance hasn’t been equal globally. How are you thinking about regional allocations, and what’s your view on Australia?
Matthew Quaife:
We like the US, particularly the tech sector, and themes like grid upgrades—the need to expand electrical infrastructure to support growth.
We’ve been more cautious on Europe due to its exposure to energy shocks. Japan, however, looks attractive as a recovery play, with supportive policy and growth. We like Japanese mid-caps and banks.
Southeast Asia is an area we’re more cautious on for now. Some regions are still heavily exposed, and the risk-reward doesn’t look compelling until there’s more certainty.
For Australia, the outlook is more positive, particularly due to its exposure to natural resources. We also see potential strength in the Australian dollar, especially against the US dollar, and view current levels as an opportunity.
Lukasz:
What if the conflict drags on without resolution? What scenarios are you considering?
Matthew Quaife:
That’s the key risk, and it’s why our positioning is slightly more conservative than it otherwise would be. While our base case is still for resolution, time is a factor.
We’re watching closely for deeper impacts, particularly in areas like energy supply heading into summer in Europe. The risk scenario is a stagflationary environment—slower growth and higher inflation.
In that case, bonds may eventually respond differently. If growth weakens significantly, it could outweigh inflation concerns, leading bonds to rally again. That’s something we’re monitoring closely, particularly timing around different parts of the yield curve.
Lukasz:
Finally, if you had to summarise your top three takeaways for investors navigating this environment, what would they be?
Matthew Quaife:
First, the AI-driven investment cycle is a bigger structural driver than the geopolitical situation. While conflicts dominate headlines, underlying shifts like capex growth are more important.
Second, focus on the parts of that cycle that are less expensive and more essential—like infrastructure and industrials.
Third, rethink diversification and portfolio construction. Correlations can break down when you need them most, so traditional models based on historical averages may not hold. Instead, rely more on scenario analysis and stress testing rather than assumptions of normal distributions.
Lukasz:
That’s great advice. Matt, thank you very much for your time.
Matthew Quaife:
Pleasure to be here.
