In times of war, marked volatility may appear in the market depending on who the participants are. And not all investment profiles enjoy the same tolerance for price swings.
If we focus on the current Russia-Ukraine conflict, the first thing to note is that these two countries represent 2% of global GDP.
Due to the reduced weight of these economies, there are no fundamental fundamentals to worry about the valuations of our investment portfolio.
Also, stock market crashes caused by geopolitical events tend to be very short-lived. Analyzing the evolution of the US stock market represented by the S&P500, after the main military conflicts developed since 1945, the markets tend to fall the first week but in fourteen of the eighteen most important geopolitical episodes, they have tended to rise in the following three months with an average return of 2%.
Despite what has been described, many of the investors want to protect themselves from volatilityso we will point out the asset resignation strategy that tends to work in times of war.
looking for shelter
Classic haven assets do well in this context. We talk about the US treasuries, the Swiss franc, the yen, gold and of course the US dollar which starts with the perspective that the Federal Reserve has indicated that it will increase interest rates in the coming months.
But among them, gold has emerged as the best performing asset class so far in 2022, after underperforming most risk assets last year.
The metal is trading above $1,900 per ounce on the international market, its highest level since June 2022. On stock markets, the metal is up more than 6% so far this year, compared to a general fall in the main stock market indices worldwide.
But we can also focus on the resignation of the investment portfolio, from the point of view of the economic characteristics of the protagonists of the War: Russia supplies almost a third of Europe’s energy (40% of EU gas imports and 30% of oil imports) and Ukraine exports large amounts of corn, wheat and oilseeds.
The most significant risk is centered on the supply interruptions and commodities can serve as an effective geopolitical hedge for investment portfolios.
Raw materials not only would they offer relatively high returns in the face of the persistent inflation that was already tightening the conflict, but a potential supply crunch would also rise in value rapidly and act as a hedge, offsetting a simultaneous decline in equities.
Let us remember that the Bloomberg commodity index is up 29% in the past year as inflation took hold with rising energy prices. The conflict would be one more catalyst to put pressure on energy prices.