CIO sees ways investors can consider improving the resilience of portfolios, including proper diversification, an allocation to hedge funds, and exposure to gold, oil, and the Swiss franc. (UBS)
Against this backdrop, CIO favor strategies to improve portfolio resilience while enabling investors to participate in market upside.
International conflicts and US elections have added to uncertainty for investors.
- Ukraine has held parts of Russia's Kursk region, and is pushing its Western allies for permission to strike deeper in Russian territory.
- Tensions remain elevated in the Middle East, with the latest escalation being a deadly covert pager attack on thousands in Lebanon.
- US Vice President Kamala Harris has maintained a narrow but consistent polling lead over former President Donald Trump.
But we advise investors against exiting risk assets in response to this uncertainty.
- Market shocks from war and geopolitical crises have historically had only temporary effects on asset prices and long-term market growth.
- US political outcomes are far from the largest driver of financial market returns. Economic data and Fed rate cut expectations remain at least as important.
- Selling locks in otherwise temporary losses and hampers investors' ability to participate in the next market recovery.
We favor strategies to improve the resilience of portfolios and remain invested.
- A well-diversified portfolio can potentially reduce the volatility arising from geopolitical conflicts or electoral uncertainty.
- Structured strategies can help investors retain exposure to further potential gains in stocks while reducing sensitivity to a correction. Separately, we believe macro hedge funds are well-placed to help risk-tolerant investors navigate geopolitical shifts.
- Investors may consider using gold, oil, and the Swiss franc as portfolio hedges.
Did you know ?
- The effects of international conflicts on markets typically fade fast. Since the attack on Pearl Harbor in 1941, the S&P 500 has been higher two-thirds of the time 12 months after the start of a crisis. Half the time, markets have only taken a month to recover, according to our analysis.
- Diversification has been shown to help reduce portfolio volatility, ensure investors tap more sources of return, and help investors avoid behavioral bias amid uncertainty.
- Hedge funds have historically exhibited an ability to capture tactical dislocations across sectors and asset classes to generate alpha, while still adhering to strict risk limits.
Investment view
We believe exiting markets in response to immediate geopolitical uncertainty tends to be counterproductive. Instead, we see ways investors can consider improving the resilience of portfolios, including proper diversification, an allocation to hedge funds, and exposure to gold, oil, and the Swiss franc.
Main contributors: Daisy Tseng, Jon Gordon
Original report - How can investors deal with geopolitical risks?, 20 September 2024.
