Markets were spooked overnight as geopolitical tensions in the Middle East sent investors towards safer assets amid fears that the situation might escalate, disrupting oil supply chains.
Traders are being cautions as there is a lack of clarity on how the Middle East situation will evolve, with gold and oil prices surging after Iran's missile attack on Israel.
As tensions rise, market analysts are closely watching the risk of disruptions to oil production and exports, particularly if the conflict spreads or targets vital infrastructure in key oil-producing nations.
Investors are considering whether Israel will respond directly to Iran, after prime minister Benjamin Netanyahu vowed that Iran "will pay for it".
Chris Weston, head of research at Pepperstone, said: “In the chain of potential market volatility shocks, geopolitics will typically trump economics, corporate earnings, or a central bank response — largely because most market players are poor at pricing risk around these events.
“While these events typically reconcile in a market positive fashion, the tail risk it can throw up is clearly significant.
“The situation remains fluid, and the slightest calming or increased aggression in the rhetoric from Israel or Iran could result in a sizeable impact on sentiment in markets.”
Regardless of how the situation evolves, investors should prepare their portfolios for geopolitical risks.
"It's not just about reacting to headlines, but positioning yourself for both immediate market volatility and long-term impacts. In this increasingly fragmented world, staying strategically prepared is essential," Charu Chanana, head of FX strategy and global market strategist at Saxo, said.
Economists at Jefferies suggest adopting a low-risk investment profile amid the unpredictability.
How to protect your portfolio from geopolitical risks
The magnitude of Israel’s retaliation against Iran will determine the inclination of markets to price in more geopolitical risk. But for those who want to act now or just be prepared for future volatility, these are the sectors of the market more resilient against geopolitical tensions, according to Chanana.
Core sectors for geopolitical resilience
Artificial intelligence and semiconductors
The race for technological supremacy is intensifying, with AI positioned as a pivotal player in global power dynamics. Investors should consider allocating to:
As cyber threats loom large, robust cybersecurity solutions have become integral to national defence and corporate integrity. Suggested investments include:
ETFs: First Trust Nasdaq Cybersecurity ETF (CIBR), Global X Cybersecurity ETF (BUG)
Renewable Energy
In a bid to reduce reliance on unstable fuel sources, renewable energy is emerging as both an environmental imperative and a matter of national security. Potential investments include:
Stocks: NextEra Energy (NEE), Enphase Energy (ENPH)
ETFs: iShares Global Clean Energy ETF (ICLN), Invesco Solar ETF (TAN)
Strategic equity sectors for long-term growth
While geopolitical events may trigger short-term market fluctuations, they also have lasting implications. In our interconnected world, it’s crucial to prepare for these persistent risks. Key sectors poised for sustained returns include:
Healthcare: iShares Healthcare Innovation ETF (HEAL.AS), Health Care Select Sector SPDR (XLV)
Technology: Technology Select Sector SPDR (XLK), Vanguard Information Technology (VGT)
Financials: Financial Select Sector SPDR (XLF), iShares Global Financials (IXG)
Energy: United States Oil Fund (USO), Energy Select Sector SPDR (XLE)
Essential portfolio safeguards
In times of geopolitical instability, incorporating safe-haven assets can bolster portfolio resilience against conflict and inflation. Safe havens, which are expected to retain or appreciate in value during economic downturns, include:
Currencies: US dollar (Betashares US Dollar ETF) (USD.AX), Japanese yen (Invesco CurrencyShares Japanese Yen Trust ETF) (FXY), Swiss franc (Invesco CurrencyShares Swiss Franc Trust ETF) (FXF)
Cash or cash equivalents: Money market funds
Saxo cautioned that in a world where geopolitical shocks are an ongoing concern, proactive portfolio positioning is not merely wise — it’s essential. By thoughtfully allocating investments across these key sectors, stocks, and ETFs, investors can mitigate risks while also seizing opportunities that arise amidst volatility. Chanana said: “Don’t wait for the next crisis — be prepared for it.”
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