The escalation of tensions in the Middle East this week puts into perspective the military and humanitarian crisis in the region. While investing pales in significance to the other ramifications of war, it is the thing here at Trustnet we are supposed to focus on, so we will do just that.
At times like this it is easy to panic. After all, even selecting the best funds won’t help you if risk assets all sell off in response to the shifting geopolitical landscape.
But that hasn’t happened. Not this week, at least. Markets, so far, appear surprisingly unruffled. They are still high on the sugar rush from the US Federal Reserve’s 50 basis points interest rate cut. And emerging markets are enjoying the bounce from China’s colossal package of stimulus measures.
But for investors who are concerned about geopolitical risk, how should they position their portfolios? What should they buy and sell, and what strategies can provide protection?
To make a few observations, defence stocks and oil companies should do well during periods of military conflict, although equities in general and other risk assets may suffer. Investors might also flock towards safe-haven assets such as gold, government bonds and the dollar.
Although gold hit fresh highs recently, several experts expect the yellow metal to rally further, as senior reporter Matteo Anelli found out this week.
Rebekah McMillan, an associate portfolio manager in the multi-asset team at Neuberger Berman, told him that gold remains an attractive asset for “those seeking stability in the face of geopolitical and recessionary risks.”
She anticipates “heightened market volatility in the lead up to the US election, the potential implications for US-China relations, as well ongoing uncertainty surrounding conflict in the Middle East, as well as between Russia and Ukraine.”
Meanwhile, Stephen Innes, managing director of SPI Asset Management, thinks the dollar is “the most straightforward hedge […] for insulating against the storm that could hit if oil prices surge further”. However, “the dollar's fate is tied to how the US data and Fed messaging stack up against the unfolding geopolitical drama”, he concluded.
Another consideration is whether the Middle East conflict could lead to a supply chain meltdown and a renewed global inflation shock, which would impact interest rate decisions and have a knock-on effect on financial markets.
Against such an uncertain backdrop, one option would be to invest with a contrarian manager such as Ruffer, which employs portfolio protection strategies and invests in several areas it expects to rally if equities fall.
Yet in a severe crisis, cash would be the most important thing to own, and most financial planners recommend putting aside at least three months’ worth of living expenses in cash – more if you can afford it – to guard against everything from redundancy to a financial crisis.
But before we all start panic-selling equities and stashing cash under the mattress, it is important to remember that although the last major, coordinated sell-off of risk assets in 2022 was immensely painful for investors, markets did recover eventually and then headed for a bull run.
Did investors who sat on the sidelines in cash in 2022 – no doubt with a high sense of relief – then miss out on the subsequent recovery? If they got back into equities in time for the upswing then bravo, but that is no easy trick to repeat.
Perhaps standing pat may be the best bet for now, while adding some more defensive positions at the margin that can be ramped up if required.