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The world is in a rather sad state of affairs at the moment. Not only do we have the ongoing war in Ukraine, but now we’ve a new conflict in the Middle East causing unimaginable human suffering.
Yet as difficult as it is to cast aside the profound impact on humans, it’s worth understanding how geopolitics and financial markets are closely interlinked.
In this article, we’re going to attempt to shine a light on how global events can impact different assets. Plus, we’ll explain ways for investors to protect their portfolio from volatility caused by external events. Keep on reading for all the details or click on a link to head straight to a section…
In (very) general terms, ‘geopolitics ‘refers to the actions and policies of nations, international alliances, and trade agreements.
Due to the events in Ukraine over the past year or so, we know how Geopolitical events can have the power to create a domino effect that can extend to financial markets. So let’s explore this in greater detail, by taking a look at how ongoing conflicts – such as those in Ukraine and the Middle East – have impacted the price of commodities over recent times.
Back in 2022, when Russian tanks entered Ukraine, we saw the price of commodities, such as wheat, oil, and other fossil fuels, soar as markets became worried about future supply.
While prices have since begun to stabilise somewhat, we’ve just seen another spike in commodity prices following Hamas’ shock attack on Israel on 7 October.
Take oil for instance…
A barrel of crude oil jumped to $90 (£74.15) earlier this week, compared with $82 at the beginning of the month. And given we’re on the verge of wider conflict in the Middle East, it could certainly go higher.
As we know, we now rely almost solely on the Middle East for our fossil fuels needs, whether we like it or not! (This is one of the reasons why current Russian sanctions might not be the most effective way to deal with the current situation… but that’s a topic for another day!).
Even if you aren’t directly invested in fossil fuels, or other commodities that are closely linked to an ongoing conflict, it’s worth understanding that financial markets, including stocks, bonds, currencies etc, essentially serve as a global barometer of economic health.
This is why, when certain markets suffer – such as oil, wheat etc – we often see other, seemingly non-related stocks tumble.
Take the FTSE 100, for example. It’s down almost 3% in the space of a month, while the FTSE 250 – the UK’s second-largest index, has slipped a whopping 8%. Meanwhile, yields have also been rising on Government bonds in recent weeks, which is bad for holders of bonds.
Not all this can be blamed on the conflict in Israel of course, but there’s little doubt it’s had a significent impact.
Yet while equities and bonds have suffered a fair bit over the past few weeks, it’s a different story for other assets, Take gold for example. It has risen 3.4% over the past month which is likely due to the fact that investors are now turning towards safer assets amid current global instability. (Do take a look at our article on investing in gold to discover why the precious metal often performs well during challenging economic times).
On a similar note, the past month has been a decent one for cryptocurrency. Bitcoin is up a spectacular 30% over the past 30 days or so, while Ether has risen 13% over the same period. Again, this is evidence that investors are turning to alternative havens amid the current economic uncertainty – though always bear in mind that investing in cryptocurrency is a high risk investment (and your holdings could fall to zero!).
Geopolitical factors are a critical part of the risk landscape that all investors should take into account before putting together a portfolio. This is why you should accept (and embrace!) geopolitics when picking and choosing your assets, even if you wouldn’t consider yourself particularly interested in everyday politics.
Yet getting your head around evolving geopolitics can be rather challenging, so if you’re an investor keen to adapt to geopolitical issues, then here are 3 factors to keep in mind….
A nation’s political stability, or lack thereof, can have a big impact on its financial markets. Political stability is often associated with investor confidence and economic growth, while political instability can lead to uncertainty and volatility in the markets. For example, coups, uprisings, or sudden leadership changes may all lead to turbulent market reactions.
Think back to the 2016 Brexit vote for example when we saw equity and currency markets – both at home and abroad – twist and turn as investors grappled with the ongoing uncertainty and risk. Likewise, the 2008 financial crisis taught us how the housing market and subsequent banking sector turmoil, had deep-seated geopolitical roots.
International conflicts, trade wars, and sanctions can disrupt global trade, affecting economies and financial markets. For instance, the U.S.-China trade tensions in recent years had a big impact on global stock markets, as investors have had to weigh up the financial impact of trade negotiations and tariff implementations – though it’s far to say that this was a bigger concern under the Trump era!
More recently, the current Israel-Hamas war has laid bare how the price of everyday commodities can rise when supply looks to be at risk.
Government policies, such as taxation and monetary policy (such as quantitative easing), can shape the economic and financial landscape. For instance, decisions related to interest rates, inflation targets, and government spending can have far-reaching implications.
For example, one of the reasons why the FTSE 100 has had such a poor year (so far) might be blamed on the Bank Of England’s successive interest rates rises which has undoubtedly harmed a number of companies within the UK’s blue-chip index.
While we, sadly, cannot control the evils of war, and other negative global events, there are ways for investors to manage and mitigate the risks associated with geopolitics.
From portfolio diversification, to keeping informed of current affairs, here are some ways for investors to keep within their tolerance for risk when it comes to navigating geopolitical uncertainty…
A well-diversified portfolio can help spread risk across different asset classes and geographical regions, reducing vulnerability to geopolitical shocks. For more on this topic read our article that explains the importance of holding a diversified portfolio.
While many geopolitical events are unexpected, keeping a close eye on international developments might, at the very least, give you a slight advantage over other, less informed investors, should you wish to actively manage your portfolio based on external events.
Not only can a long-term investing perspective prevent you from making any knee-jerk decisions based on emotions but keeping a long-term mindset can also help you weather any short-term geopolitical storms and, hopefully, allow you to benefit from market growth over time.
If you’re investing for the first time, do take a look at our article that explains how to set your investing strategy in 5 simple steps.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
Cryptoassets are highly volatile and unregulated in the UK. No consumer protection. Tax on profits may apply.