How geopolitical unrest impacts global markets

Recently, the world has experienced many instances of geopolitical unrest, including the ongoing Russia–Ukraine and Israel-Hamas wars. Inevitably, these influence global financial markets and often lead to immediate and extreme reactions, as well as long-term economic shifts. The global markets are no strangers to volatility – nevertheless, during periods of escalating global tensions, this volatility only increases and has disproportionate effects on different sectors.

Defence and security related stocks could see a boost

Defence and security-related stocks might rally due to increased demand, whereas manufacturing and technology stocks may suffer disruptions and a decline in stock value amid geopolitical conflicts. What’s more, commodities such as oil are especially sensitive as global tensions trigger supply concerns, resulting in prices rising. Understandably, investors are likely to seek stability, with gold, viewed by investors as a safe haven in times of uncertainty, often rising in value.

Additionally, long-term effects such as the success of certain sectors are triggered. The high demand for reconstruction that tends to follow conflicts is likely to provide a boost to the construction and infrastructure industries, while shifts in government spending patterns may also occur which could lead to inflation, impacting both currencies and bonds.

It is important that investors are mindful of these dynamics and trends in order to ensure that they invest successfully during geopolitical uncertainty.

Investments in periods of geopolitical turmoil

Previously, global geopolitical conflicts have altered investment landscapes. For instance, the Cold War era saw a sustained increase in defence and technology investment, driven by the arms and space races. However, this is not just case for global unrest – regional conflicts have also impacted global markets in years gone by. An example of this is the Gulf War, which had a significant impact on the world’s oil market, with prices fluctuating regularly throughout the conflict.

With market instability, it is vital that investors balance impulsive decisions with rational choices. When influenced by emotions like fear and greed, traders are likely to make hasty and unwise decisions. In order to have an effective risk management strategy in times of high volatility, a diversified investment portfolio is needed as well as clear investment horizons, as well as the utilisation of stop-loss orders to decrease the likelihood of losses. Adding to this, staying informed and flexible enables individuals to effectively manage the challenges the market conditions present.

When trading during periods of political conflicts or tensions, investors tend to play it safe and put their money in secure places like gold or bonds to protect themselves from potential losses – an investment setting referred to as “risk-off”. In contrast to this, with “risk-on” investment behaviour, traders feel positive about the global economic outlook and are willing to take on greater risks. This sees them invest in more volatile financial instruments, such as stocks. Whether traders utilise a “risk-on” or “risk-off” strategy depends entirely on how comfortable they feel with the current global situation, from an economic perspective and beyond.

The influence on asset classes

Geopolitical unrest has varying effects on asset classes. Investors can learn from history and monitor the assets that are likely to be impacted:

• Stocks – As mentioned, defence and security-related stocks are likely to boom due to a significant surge in demand. Furthermore, tourism and retail-related stocks may decline as they are reliant on stable conditions and global trade. Typically, overall market volatility will rise
• Bonds – With the markets becoming more volatile, traders may turn to government bonds as safe heavens, but this can change contingent upon the nation’s economic stability. Geopolitical unrest may lead to a change in a country's default risk or the imposition of economic sanctions, in turn resulting in bond downgrades
• Gold – Trader's view gold as a safe-haven asset as it is used to hedge against market instability and value reductions in currency
• Oil – If an oil-producing country is involved, prices can surge due to disruptions in supply. However, these increases may only be short term as global supply chains adapt
• Metals and additional commodities – The prices of metals such as copper and aluminium may vary in response to the conflict's effects on supply chains; however, they typically rise due to heightened demand. Furthermore, disruptions in trade and shifts in global demand can affect agricultural commodities 
• Cryptocurrencies – As cryptocurrencies are relatively new to the financial landscape, the influence of global tensions is difficult to predict. Investors may view crypto as a risky asset, meaning it would suffer during market uncertainty. On the other hand, traders could see it as an alternative to traditional financial markets, especially in the event fiat currencies weaken

How to strategically trade in volatile conditions

Trading successfully in times of political destabilisation needs separating between short-term and long-term strategies. Short-term strategies will centre on instant market reactions, which require swift responses to news and events. In contrast to this, long-term strategies focus on wider economic shifts such as a rise in demand in defence and infrastructure.

Traders can mitigate risks by diversifying across asset classes and geographies. Diversification is also vital in changing asset allocation in response to market changes. Investors need to make sure that they are staying informed and that they are flexible in an ever-evolving environment.

Diversifying strategies

Despite the significant consequences of geopolitical unrest, sectors such as defence, technology and renewable energy can grow. A defensive strategy may involve investing in more stable industries such as utilities, healthcare, and consumer staples. Additionally, by utilising hedging techniques such as using derivatives and investing in assets that are likely to plunge, traders can safeguard against volatility. Ultimately, a diversification strategy can act as a buffer during market instability.

With the risks that are introduced in periods of uncertainty, investing requires a cautious and dynamic approach. This will lead to strategic investments in certain industries and will highlight the significance of diversification and defensive strategies. By being aware of the impact global events have on asset classes and utilising hedging techniques, investors have all the knowledge they need to safely navigate a volatile financial landscape.