The Iran conflict: our response

The Federated Hermes investment teams approach the market disruption caused by the US and Israel joint attack on Iran with a focus on risk management, valuation discipline and selective opportunity capture. The conflict has introduced new uncertainty through rising oil prices, elevated inflation risk and higher volatility. Here are ways our investment teams are addressing risks, and where they see opportunities:

Addressing risks

• Aiming to limit downside in an environment where energy-driven inflation can push yields and volatility higher
• Seeking to reduce exposure to regions most sensitive to geopolitics by favoring the US over international markets, where macro vulnerability to energy and inflation is higher
• Tightening quality standards 
• Monitoring private credit for valuation pressure as discount rates rise
• Maintaining liquidity and diversification
• Assessing the hit to earnings from higher input costs, particularly in energy and transport

 
Where we see opportunity

• Higher yields across investment-grade and high-quality securitized assets could offer attractive entry points
• Volatility could create better compensation for holding duration in selective areas
• Elevated geopolitical tension could support a multi-year upgrade cycle in global defense spending
• Commodity-linked emerging markets (EM) countries could benefit from higher oil and metals prices
• Dislocations in EM debt markets could create attractive total return setups

In summary

• So far, the oil price shock is the main mechanism through which the Iran conflict has influenced inflation, growth and asset pricing
• Our teams are coordinating their assumptions around energy volatility to produce more consistent risk management
• They are responding to market disruption with a focus on risk management, valuation discipline, and selective opportunity capture

Read more perspectives on the Iran conflict from our thought leaders