Hi, I’m Vesna Peroska, Portfolio Manager from Morningstar Investment Management. Welcome to the Morningstar Market Minute, a video series where we explore markets, the economy, and other notable trends. We’ll kick off by discussing key market events, Morningstar’s outlook, and how our portfolios are positioned for the current environment.

Oil has rallied a record-setting 35% this past week, in response to events in the Middle East. Whether this price move proves to be short-lived or more permanent will be important for valuations.

Before March, the Fed’s path forward was narrowing—with not much distance between hawkish and bearish outlooks. Today, uncertainty has increased for the path forward with higher inflation and weaker employment data.

Later this week we have more economic releases, including US inflation and GDP prints. While markets may be watching for any unexpected news, in reality, the data are of little use to markets trying to digest the potential longer-term implications of higher energy prices.

The equity market moved to quickly factor a higher oil price into Japan and Korea. Both countries are net energy importers with large industrial sectors—susceptible to margin pressure.

Meanwhile, software companies recovered after initial falls. Sentiment had already been affecting the sector in the lead up to last week, on concern that valuations may look stretched if the E is at risk. While it is too early to tell who the winners will be from the adoption of AI, markets are pricing companies with embedded enterprise workflows as at risk.

Similar sentiment could be seen across credit markets. High yield spreads remain narrow, not pricing the longer-term risks to growth. Yet, in private credit software has seen spread widening, with the entire sector pricing as a loser. This puts pressure on higher quality business models by raising financing costs across the board.

De-dollarisation headlines took a back seat as the USD served as a safe haven asset. Supporting unhedged US equity returns. Providing some protection in portfolios.

Diversification is an often-used term in investing and may be of little solace if inflation concerns affect both equity and fixed income returns.

Most successful investing requires taking the emotion out of the decision-making equation. While it can be difficult not to be reactive to short term moves, else be swung by the markets tail. At times like these is when adhering to an investment process is of most benefit. Being able to think differently to the crowd by focusing on what matters for the longer term. If the effects of recent events look to be longer loved, we may have the opportunity to invest in well priced assets.

It is at times like these our process has proved to add most value. We are not there. While we patiently wait for events to play out, we have used market volatility to top up some Chinese tech names and EM equity more broadly. We had been favouring consumer staples, where valuation and margins should prove more resilient to inflation and have also added here.

Thank you for watching this week’s Market Minute. We’ll be back again next week.