Geopolitical tensions in the Middle East spooked markets overnight as investors turned to safer assets on fears the situation could escalate and disrupt oil supply chains.
Traders are on high alert as the situation in the Middle East remains uncertain, with gold and oil prices soaring after Iran’s missile attack on Israel.
As tensions rise, market analysts are closely monitoring the risk of disruption to oil production and exports, especially if the conflict escalates or targets critical infrastructure in major oil producing countries.
Investors are weighing whether Israel will respond directly to Iran after Prime Minister Benjamin Netanyahu vowed that Iran would “pay a price.”
Chris Weston, head of research at Pepperstone, said: “Geopolitics will typically take precedence over economics, corporate profits and central bank responses in the chain of potential market volatility shocks. “This is because most market players are not very good at pricing the risks associated with these events.”
Read more: Oil prices soar amid tensions in Middle East, gas prices could rise
“While these events typically align positively with the market, the tail risks they can pose are clearly significant.
“The situation remains fluid, and any lull in rhetoric from Israel or Iran, or even an increase in aggressiveness, could have a significant impact on market sentiment.”
Regardless of how the situation develops, investors should prepare their portfolios for geopolitical risks.
“Rather than just reacting to the headlines, it’s important to prepare for both immediate market volatility and long-term impacts. In an increasingly fragmented world, being strategically prepared is essential. ” said Charu Chanana, Head of Currency Strategy and Global Market Strategist at Saxo. Said.
Jefferies economists suggest adopting a low-risk investment profile amid the unpredictability.
How to protect your portfolio from geopolitical risks
The scale of Israel’s retaliation against Iran will determine the market’s tendency to price in more geopolitical risks. But for those who want to act now or prepare for future volatility, Chanana says these are market sectors that are more resilient to geopolitical tensions.
Core sectors for geopolitical resilience
Artificial intelligence and semiconductors
The race for technological superiority is intensifying, and AI is playing a pivotal role in global power dynamics. Investors should consider allocating to:
Stocks: NVIDIA (NVDA)), Advanced Micro Devices (AMD)
ETF: VanEck Semiconductor ETF (SMH), iShares Semiconductor ETF (SOXX)
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defense
Defense budgets are increasing as tensions rise, highlighting the need for advanced military technology. Investors can consider:
cyber security
As cyber threats continue to loom, robust cybersecurity solutions have become essential to national defense and enterprise health. Recommended investments include:
Stock: Palo Alto Networks (PANW), CrowdStrike (CRWD)
ETFs: First Trust Nasdaq Cybersecurity ETF (CIBR), Global X Cybersecurity ETF (BUG)
renewable energy
To reduce dependence on unstable fuel sources, renewable energy has emerged as both an environmental imperative and a national security issue. Potential investments include:
Stocks: NextEra Energy (NEE), Enphase Energy (ENPH)
ETFs: iShares Global Clean Energy ETF (ICLN), Invesco Solar ETF (TAN)
Strategic stock sector aiming for long-term growth
Geopolitical events can cause short-term market fluctuations, but they can also have lasting effects. In our interconnected world, it is important to prepare for these persistent risks. Key sectors with potential for sustained gains include:
Healthcare: iShares Healthcare Innovation ETF (HEAL.AS), Healthcare Select Sector SPDR (XLV)
Technology: Technology Select Sector SPDR (XLK), Vanguard Information Technology (VGT)
Financials: Financial Select Sector SPDR (XLF), iShares Global Financials (IXG)
Energy: United States Oil Fund (USO), Energy Select Sector SPDR (XLE)
Important Portfolio Safeguards
In times of geopolitical instability, incorporating safe assets can make your portfolio more resilient to conflict and inflation. Safe havens that are expected to maintain or increase in value during a recession include:
Gold: SPDR Gold Shares (GLD), iShares Gold Trust (IAU (IAU))
Bonds: iShares TIPS Bond ETF (TIP), Vanguard Short-Term Bond ETF (BSV)
Defensive stocks: Coca-Cola (KO), Procter & Gamble (PG), Utilities Select Sector SPDR (XLU)
Currency: US dollar (BetaShares USD ETF) (USD.AX), Japanese yen (Invesco CurrencyShares Japanese Yen Trust ETF) (FXY), Swiss franc (Invesco CurrencyShares Swiss Franc Trust ETF) (FXF)
Cash or Cash Equivalents: Money Market Funds
Saxo warned that in a world where geopolitical shocks are an ongoing concern, active portfolio positioning is not just prudent, it is essential. By carefully allocating investments across these key sectors, stocks, and ETFs, investors can seize opportunities that arise amidst volatility while reducing risk. “Don’t wait for the next crisis, prepare for it,” Chanana said.
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