Written by Cormac Nevin
While events in Iran over the weekend were troubling across a number of dimensions, the market impact this morning remains relatively muted. At the time of writing, Asian equity markets are down between 1-2%, however, this is on the back of very strong returns in February. US Equity futures markets are down a modest ~1%, reflecting the reality that the US is now a net energy exporter and far less reliant on the Strait of Hormuz. FTSE 100 futures are down only -0.68%, reflecting the composition of that market, and the US dollar has rallied a modest +0.6%. Energy and commodity/precious metals markets are up sharply, illustrating the diversification benefits they bring to a portfolio. We are mindful that recent geopolitical troubles in Iran, Venezuela and threats to NATO/Greenland have proven no impediment to the consistent compounding of returns, and interrupting that process would have proved costly.
Last week was a good one for market returns; the MSCI All Country World Index was up +0.8%, boosted by very strong returns from Emerging Markets (+3.3%) and Japan (+3.0%). The US market was the largest underperformer (0.0%).
Away from geopolitics, one of the most important market stories in recent months has been the sharp fall in some software companies, particularly those operating on a “software-as-a-service” (SaaS) model. The reason is simple: artificial intelligence tools are becoming very good at writing and improving computer code. Your author has downloaded Claude Code on his personal machine and has been blown away by its capabilities. If software can be built faster, more cheaply and by anyone, investors are questioning whether some companies can continue charging high subscription fees and maintaining very high profit margins. Many of these companies have been market darlings for the past decade, touting the “quality” characteristics of their asset-light, high-margin business models, and they traded on a very high premium for that reason. Indeed, over-indexing on these sorts of businesses arguably made the fortunes of many fund managers who are household names in the UK.
This does not mean software businesses are in trouble across the board, and opportunities abound. Many will adapt and benefit from AI. But it does mean that investors are being more careful about paying very high prices for companies whose future profits may now be less certain and whose perceived moats may be much less defensible than previously thought.
Diversification becomes ever more important in a world that is rapidly being disrupted by new technologies.
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