When storms blow up, investors want to be on the most stable, robust vessel they can find, and the same applies to investing in volatile times. The author considers a few ideas.

In these uncertain economic and tense geopolitical times, safeguarding investments is very much on the agenda. To discuss the main approaches is David Absolon, investment director at Handelsbanken Wealth and Asset Management (more on the author below).

David Absolon

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Financial markets can be unpredictable at the best of times but navigating them during periods of geopolitical risk can prove particularly challenging. Given the current climate, shaped by armed conflict in Europe and the Middle East, major elections across countries collectively representing 40 per cent of the world’s economy, and the possible threat of a trade war between the US, Europe and China, it’s safe to say risk remains elevated. 

Should this environment worry investors, and how can we manage associated risks within our investment strategies? 

Given their diverse nature, there is naturally no “silver bullet” when building investment strategies to account for geopolitical risks. Using a combination of diversifiers gives us the best chance of cushioning investment strategies, should risks become reality. 

Bonds
The current interest rate environment has seen more aggressive hikes than the last four decades, and with bond prices having fallen, yields have leapt up to around 4.4 to 5 per cent. The upward move in bond yields has put them back into contention when it comes to the power of diversification. Should geopolitical risks unfold, the expectation would be for yields to fall, and the market value of bonds to rise.

Specialist protection strategies
Specialist financial products have essentially been created to act as insurance for investors looking to guard against risk. “Tail-risk protection” is one example of a specialist financial product – designed to provide returns in the event of a sudden and meaningful market downturn. As with most kinds of insurance, you will pay premiums but will not receive anything in return. 

However, when a meaningful and sudden enough downturn takes place, the insurance will kick in and the premiums paid will ultimately be worthwhile. It does, however, require a very specific set of events to produce returns which justify holding a position for an extended period. Covid-19 was one example of a crisis which triggered dramatic enough falls in the stock market in a very short space of time, for tail-risk protection to come into full effect. They still form part of the arsenal, but less so given what has happened to bonds, as we now get paid to wait in bonds until the full diversification properties are required. 

Gold
Gold is unarguably the best-known safe haven in financial markets. While often a good hiding place during times of market turbulence, long-term performance would suggest it is an unreliable “port in a storm.” 

Gold outperformed during the 2008 financial crisis for example, but from a long-term perspective, it has sometimes not provided the safe haven that investors would have hoped for during inflationary, or deflationary, times. Placing a value on gold can be very difficult, which poses a problem. This is because gold does not produce a yield, in the way that bonds do, and supply and demand dynamics are volatile.  

Despite this, it remains a useful diversifier during times of heightened geopolitical risk. Alternative options, such as hedge funds, have been viewed previously as a panacea for diversifying investment portfolios, but overall performance has dwindled since 2008. Bearing this in mind, gold most certainly has a place in multi-asset portfolios.

US dollar
The US dollar is another familiar asset for diversification, and somewhat more reliable in the long term than others. Central banks and major financial institutions around the world hold it for international transactions, or as a secure store of value. Over recent years, there has been widespread speculation over the dollar’s status as the go-to reserve currency, but these concerns have never come to fruition. Over the short term at least, the dollar is likely to maintain its status. 

While there is no one-size-fits all approach, a well-crafted, diversified strategy can help safeguard our investments. Continuous monitoring, adaptability, and a long-term perspective remain essential. As the global landscape evolves, so too should the strategies employed.

About the author

David Absolon is investment director at Handelsbanken Wealth & Asset Management, where he manages the defensive investment strategy and is co-head of fixed income research. He is also a member of the tactical asset allocation team and head of investment research. Prior to this, he was investment strategist at Barclays Wealth.