Hi, I’m Joel Grosvenor, Portfolio Manager at Morningstar Investment Management. Welcome to the Morningstar Market Minute, a video series where we explore markets, the economy, and other notable trends. We’ll start by discussing key market events, Morningstar’s outlook, and how our portfolios are positioned.

This week, geopolitics took centre stage as a major military escalation in the Middle East rattled global markets, while here at home, Australia delivered a surprisingly strong economic result.

Over the weekend, the United States and Israel launched coordinated strikes on Iran, sending markets into an immediate flight to safety. Gold, government bonds, and the US dollar all appreciated on the open, while broader equity markets sold off.

One of the key risks is whether this conflict becomes prolonged. Unfortunately, these situations do not always resolve quickly, the Russia-Ukraine war began almost four years ago and continues today, and many initially expected it would be over in a matter of weeks. A drawn-out conflict in the Middle East raises the prospect of sustained energy price disruption, which feeds directly into inflation expectations and complicates the path for central banks globally.

As the week progressed, markets reversed much of the initial rush to safety. Equity markets globally continue to be volatile; however there have been sectors such as defence and oil and gas producers have rallied on the back of the conflict. Within fixed income, credit spreads have widened, but only modestly.

On the domestic front, the Australian Bureau of Statistics released Australia’s December quarter GDP figures on Wednesday, and the result was better than expected, with the economy expanding 0.8% for the quarter and 2.6% for the year, ahead of market forecasts. The Australian dollar and local equities both fell on the day, weighed down by the broader risk-off environment. There’s also a more subtle tension here, as strong growth combined with rising inflation raises the prospect of the RBA maintaining its tightening bias.

In periods where market volatility and fears are heightened, sticking to your investment process is paramount to ensuring portfolios remain aligned with their long-term objectives. Across our portfolios, we have been defensively positioned coming into this period of volatility, primarily due to elevated valuations in parts of both the equity and fixed income markets. Given the quick reversal in sentiment, we’re maintaining this positioning and remain focused on tilting the portfolios towards the best risk for reward opportunities as they arise.

That’s it from me, look out for next weeks market minute.