Equity markets have been resilient
At the time of writing the market response has been interesting, and a real reminder that geopolitical risk remains one of the most unpredictable forces in investing. So far, equity markets have been fairly resilient and do not show signs of selling off like we have seen at the beginning of other recent conflicts.
This may reflect a sense of inevitability surrounding the action, or perhaps it signals that markets had already priced in a considerable degree of risk well in advance. Either way, it is a point worth emphasising when speaking to your clients who may have expected far more dramatic market swings in moments like this.
Market behaviour does not follow the same pattern
Across other parts of the market, the reaction has been more of what we would expect. Gold and oil prices have risen sharply, reflecting the familiar flight to safety and concerns about potential disruptions to global supply. Defence sector names have also moved higher, with that theme looking like it will have legs for many months to come. Meanwhile, Bitcoin has provided another reminder of its lack of safe-haven status. It initially sold off sharply before gradually recovering, while gold continued a steady upward trend.
Overall, what the initial events and reactions have told is that market behaviour does not always follow the same pattern, even when responding to the similar headline events.
Geopolitical noise is a constant backdrop
For many investors, there can be a temptation in periods of heightened uncertainty to second guess what markets may do next, or to assume the worst-case scenario will inevitably play out across all risk assets. Yet, the reality is seldom so straightforward.
Some risks are discounted well ahead of time, but others linger, are underestimated, and later catch markets off guard. Understanding these nuances – and helping investors understand them – is a vital part of effective portfolio management.
Of course, what happens next in Iran will matter. Whether the escalation results in regime change, and whether any potential new regime represents a meaningful improvement, are still open questions. Prolonged instability risks pushing energy prices higher for longer, which could in turn introduce renewed inflationary pressures. This would test central banks’ efforts to steer policy in a more benign direction and could undermine the fragile improvement in consumer confidence. These are the kinds of dynamics we must consider, not as certainties, but as scenarios to be incorporated into our planning.
Diversification is key
All of this is happening at the same time as markets grapple with anxiety over AI related capital expenditure and the knock-on effects for employment and consumption. When multiple areas of uncertainty collide, fears can quickly override rational thought.
This is where diversification remains crucial even if it has been challenged in the past decade. It is the most proven way to provide a portfolio with resilience, mitigate the impact of individual shocks, and ensure that no single event – however dramatic – dictates long-term outcomes.
Remain focused on the long term
In the near term, precious metals and natural resources are going to spike higher and portfolios may become exposed to new risks in a short space of time. While these are good short-term outcomes for portfolio returns, over the long-term discipline remains key.
We must resist reactive decision making and instead follow our investment process that is measured, structured, and aligned with long-term positioning. Rebalancing is not a knee jerk response, but a fundamental part of portfolio management. It provides a counterbalance to short-term emotion, reinforces investment discipline, and helps keep portfolios aligned with their objectives even when headlines may be moving in another direction.
Ultimately, while geopolitical headlines can be unsettling, staying diversified and disciplined will keep portfolios going through any short-term volatility. Tactical opportunities will present themselves but remaining focused on the long term, and the tried and tested investment theses, will prevent any mistakes and allow your clients to keep their trust and faith during challenging times.
Once again investment markets have been thrust into a new period of volatility with events in the Middle East quickly subsuming every other risk present.