Impact of geopolitical uncertainty and its effect on markets

Commenting on the impact of geopolitical uncertainty and its effect on markets, Chris Arcari, Head of Capital Markets, Hymans Robertson, said: 

“Geopolitical uncertainty is rising up the agenda, with tensions flaring in multiple geographies.

"To some extent, this uncertainty is omnipresent, with the empirical evidence suggesting that it’s rarely game-changing from an economic and markets perspective. 

“However, the route for geopolitical events to have a more lasting effect is, in our view, whether they have scope to have a profound and persistent impact on commodity prices or lead to broader market contagion.

“Recent goings-on in Venezuela do not pass muster on either of these fronts – while Venezuela has the world’s largest proven reserves, it’s currently a small producer, and US intervention is likely to increase supply over the longer term. Iran is a different story, with the Strait of Hormuz a significant enough chokepoint to have a profound and persistent impact on oil prices. Meanwhile, escalating tensions over Greenland between the EU and US have scope to cause financial-market contagion if trade disputes spread to the weaponisation of markets. 

“However, managing a portfolio for a single upside or downside scenario is often suboptimal. Investors must also weigh the long-term opportunity cost of diversification, striking the right balance between risk-adjusted and absolute returns. Scenario-testing helps identify portfolio vulnerabilities under different conditions and uncover untapped diversification opportunities.

“Echoing economist Harry Markowitz’s maxim that “diversification is the only free lunch” in finance, we recommend scenario-testing portfolios against varied growth and inflation outcomes to uncover vulnerabilities and diversification opportunities.”

Important information

This communication is based upon our understanding of events as at the date of publication. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this page refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation. Please read our Terms of Use - Hymans Robertson.