Preparing for the Unpredictable: Geopolitics and the Market

It is difficult to open a newspaper today without being reminded of the political and geopolitical tensions shaping the global landscape. From political turmoil in the US and Europe to conflicts in Ukraine and the Middle East and renewed trade disputes, the headlines are rarely reassuring. For investors, such developments naturally raise questions: how might these events affect portfolios, and what practical steps can be taken to manage the risks? 

While politics can unsettle markets in the short term, experience shows that long-term investment outcomes are driven by fundamentals - earnings growth, innovation, monetary policy, and productivity - rather than daily news flow. Keeping that perspective helps investors navigate uncertainty with discipline. 

Short-term noise vs long-term fundamentals 

Geopolitical shocks often create volatility, but markets tend to adapt quickly. Research covering more than 80 years of geopolitical events shows that, on average, equity markets recover within 6 months of major crises. Even sharp drawdowns following conflicts or policy announcements have typically proved temporary once the focus returned to company earnings and economic data. 

Average real S&P 500 return vs. average real S&P 500 return after geopolitical events

Sources: Robert Shiller, Haver Analytics. Data as of December 31, 2023. Note: Return refers to price return. Geopolitical events in the above chart refer to 36 events selected from 80 years of geopolitical events beginning with Germany’s invasion of France in 1940 and ending with the war in Ukraine in 2022. We measured the 3-month, 6-month and 12-month returns following these events. 

However, not all shocks are fleeting. The 1973 oil crisis, for instance, created a period of structural inflation and weak productivity that weighed on returns for years. The lesson is that while most political events fade quickly, a minority can reshape economic fundamentals - and portfolios should be built to withstand either outcome. 

Caution and opportunity 

Periods of tension can make investors defensive, leading to higher cash holdings or reduced equity exposure. But being overly cautious can mean missing the early stages of recovery when sentiment improves. Markets often rebound before political situations are resolved. 

Equally, political change is not always negative. Policy shifts in taxation, infrastructure spending, or energy transition can generate long-term investment opportunities. The challenge lies in separating transient market reactions from enduring structural shifts that may reshape industries or supply chains. 

Understanding real portfolio risk 

Much of the perceived “geopolitical risk” in portfolios stems not from where companies are listed, but from what drives their revenues and costs. US-listed companies, for example, earn more than half of their profits overseas. Focusing solely on country labels can obscure the true sources of risk and resilience. 

Rather than reacting to headlines about individual markets, investors are better served by analysing underlying exposures to sectors, currencies, and supply chains - the factors that determine how political decisions actually affect corporate performance. 

Policy shocks and the case for diversification 

While markets usually recover from political noise, some policy decisions have tangible economic consequences. The recent escalation in global trade tensions, including new US tariffs on goods from China, Mexico, and Canada, demonstrates how quickly government action can disrupt supply chains and profit margins. 

Diversification remains the most effective protection. Spreading investments across regions, asset classes, and sectors helps cushion portfolios from localised shocks. This not only reduces exposure to any single policy risk but also ensures participation in growth where political or economic conditions remain favourable. 

The currency dimension 

For UK-based investors, currency movements play a significant role in returns. A strong US dollar has boosted sterling portfolios in recent years, but as rate differentials narrow and policy paths diverge, that tailwind has weakened. This shift highlights the importance of reviewing foreign currency exposures and ensuring they align with future spending or liability needs. 

Effective currency management does not mean eliminating exposure altogether - some diversification across currencies can enhance resilience - but unhedged positions should be deliberate, not incidental. 

Volatility, liquidity, and staying prepared 

Periods of political uncertainty can increase volatility, and investors should ensure liquidity plans are robust. Multi-asset portfolios often contain less liquid components - such as property, private markets, or alternatives - that may be difficult to sell in stressed conditions. Maintaining a clear liquidity plan reduces the risk of becoming a forced seller when markets fall suddenly and unexpectedly. 

Holding sufficient liquid reserves, combined with a disciplined rebalancing framework, allows investors to take advantage of dislocations rather than being forced to react to them. 

Staying focused on what matters 

Political events capture attention, but successful investing depends on perspective. Markets have endured wars, elections, and policy shocks before - and have consistently found a way to move forward. 

For clients, the priority is not to anticipate each political twist but to maintain a resilient, well-diversified portfolio aligned with long-term objectives, risk appetite, and liquidity needs. In the end, it is the fundamentals - not the headlines - that determine long-term returns.