Geopolitical tensions are events that can cause significant fluctuations in markets. Such events, especially war, economic sanctions, terrorist attacks, and political uncertainties, can cause investors to reshape their portfolios. The recent increase in geopolitical tensions in the Middle East may require you to review your portfolio. Because analyzing how to shape your portfolio during such periods is crucial to protecting your returns and limiting losses. So how can you do this? In this article, I will discuss 6 steps you can take to protect your portfolio in such situations.
1. Pay attention to energy stocks
Geopolitical tensions can directly affect the energy sector in particular. Wars in the Middle East and disruptions in oil supply can rapidly drive up oil prices. For example, after the Yom Kippur War in 1973, the oil embargo by OPEC countries caused oil prices to quadruple, leading to a global energy crisis. During the Gulf War in 1990, disruptions in oil supply also caused prices to rise rapidly. Similarly, the Russia-Ukraine conflict in 2022 rapidly increased energy and food prices, causing volatility in the markets. Oil and Gas Companies: Large oil companies such as ExxonMobil (XOM), Chevron (CVX), and BP (BP) may benefit positively during these periods. Energy stocks can gain value as prices rise when oil supply is restricted.
2. Gold and other safe-haven assets
Gold is among the safe-haven assets that investors frequently turn to during periods of geopolitical uncertainty. Historically, gold prices tend to rise when geopolitical risks increase. At the time of the Twin Towers attacks on September 11, 2001, gold prices rose rapidly, and gold served as a safe haven for investors while global markets were in turmoil. The Covid-19 pandemic in 2020 also created unprecedented uncertainty worldwide, causing market turmoil. As stock markets fell rapidly in March 2020, investors turned to safe havens. As a result, gold and bonds gained value. Investing in physical gold, gold funds, or mining companies can reduce risks in your portfolio. For example, gold-focused investments like Barrick Gold (GOLD) and Newmont (NEM) can provide diversification in the portfolio. Precious metals funds, like gold, can also be an option.
3. You can turn to defensive sectors
In periods of geopolitical uncertainty, investors are generally seen to turn to more defensive sectors. This is because these sectors consist of companies that generate more stable revenues regardless of economic cycles. For example, during the 2020 pandemic crisis, the healthcare and consumer goods sectors were less affected, and shares in these sectors gained value. Prominent defensive sectors:
Healthcare: Pharmaceutical and healthcare providers may be more resilient during such periods. For example, giant companies like Pfizer (PFE), Merck (MRK), and Johnson & Johnson (JNJ) are in sectors where demand is relatively stable. Although shares in these sectors may be affected by sharp sell-offs in the index in the short term, they may offer a more resilient outlook in the long term. Basic Consumer Goods: Companies producing food, beverages, and personal care products are less affected by economic uncertainties. Companies like Procter & Gamble (PG) and Coca-Cola (KO) stand out in this sector.
4. Defense Industry Stocks
With increasing geopolitical risks, defense industry companies may also become attractive. Increased military spending can create opportunities for companies operating in this sector. Significant returns were observed in defense industry giants, particularly during the recent Russia-Ukraine war. Defense industry giants such as Lockheed Martin (LMT), Raytheon Technologies (RTX), and Northrop Grumman (NOC) may benefit positively from increased military spending.
5. Geographic Diversification in the Portfolio
Geopolitical risks are generally focused on specific regions. Therefore, diversifying your portfolio geographically can reduce risk. A balanced distribution across the US, Europe, Asia-Pacific, and emerging markets can protect your portfolio against such shocks. For this, you can examine funds such as iShares' MSCI Emerging Markets, MSCI Europe, and MSCI Asia.
6. Bond and Money Market Funds
In times of geopolitical tension, investors generally turn to safer assets. Government bonds and money market funds can be ideal options for protecting your capital during this period.
Bonds: Government bonds stand out as a safe haven during periods of high risk. Eurobonds and Eurobond funds can also offer you options.
Money Market Funds: Money market funds, which have high liquidity and low risk levels, can also be preferred during such periods.
The information, comments and recommendations contained herein are not within the scope of investment consultancy. Investment consultancy services are provided within the framework of the investment consultancy agreement to be signed between brokerage firms, portfolio management companies, banks that do not accept deposits and customers. The comments in this article are only my personal comments and these comments may not be appropriate for your financial situation and risk return. For this reason, investments should not be made based on the information and comments in my articles.
