The direct impact of geopolitical events on financial markets can often be temporary. For instance, during the unrest in the Middle East in October 2023, the S&P 500 rallied on the first trading day after the events, with US blue-chip shares increasing by over 1%. Now, a year later, the S&P 500 has risen by more than 32%. Against this uncertain backdrop, one might expect risky assets such as shares to falter. However, sharemarkets are impacted by a multitude of different factors.
Throughout 2024, markets have shown resilience by prioritising each country’s monetary policy and declining inflation rates. This focus suggests future interest rate cuts could serve as an economic stimulus. Such cuts could benefit publicly listed companies by lowering their debt servicing costs over time. Consequently, attention has turned to company earnings and forward guidance, as investors seek insights into what they can expect in the coming months and years.
How has the price of oil been affected?
Conflict in the Middle East often leads to inflationary pressures on the oil market, primarily due to the region’s significant role in global oil production. The Middle East contributes nearly a third of the world’s oil supply, making any disruption a cause for concern. Following the October 2023 unrest, the price of Brent crude oil jumped by 3.5% to above US$88 a barrel. However, despite the conflict spreading to neighbouring countries, Brent crude has since dropped to just under US $75 a barrel.
How have these events impacted our ‘Safe-haven’ assets?
Geopolitics can lead to an influx of funds into ‘safe-haven’ assets. These are investments that are anticipated to either maintain or appreciate during geopolitical crises, terrorism, or natural disasters. While they are often seen as offering a sense of security for investors, this protection is not always guaranteed.
The most popular safe-haven investments include gold, and short-term treasuries (Government debt bonds), which may include currencies such as the US dollar and Japanese yen. Gold has increased by over 30% in the past 12 months and generally performs well during uncertain times. While commodity prices may rise in such conditions, they can also correct quickly when circumstances stabilise.
Sharemarkets can be considered safe havens, particularly in sectors such as utilities, energy, and consumer staples. Following the October 2023 attacks, it was no surprise energy shares saw a sharp global rise, with the US energy sector increasing by more than 3%.
How ‘safe’ are safe-haven assets?
Outside the sharemarket, these assets are typically more liquid, making them easier to buy and sell. However, there are indications that traditional safe-haven assets, such as US Government bonds and the US dollar, may be losing their effectiveness during times of crisis.
Similarly, while bonds traditionally rally in times of turmoil, the performance of these investments during recent crises has been unpredictable. For instance, in March 2020, during the pandemic, long-term bonds didn’t attract the usual safe-haven flows. Instead, yields rose sharply, meaning prices fell.
A similar pattern occurred in 2022 and 2023 when inflation was high globally, and interest rates rose, having a negative impact on the value of these investments.
As an investor, what should you do?
Geopolitical risks can have major long and short-term impacts on financial markets and the global economy.
While it’s important to remain cautious during major global events, it doesn’t mean you should make impulsive changes to your portfolio or stop investing in favour of interest-bearing assets. Maintaining a balanced approach is key to navigating market uncertainty.
History shows that on average, investors do more damage to their finances than markets do. In other words, they compound losses by selling out, or becoming overly conservative, after markets have dropped. Maintain control of your thoughts and don’t panic.
And remember, a long-term view is essential when investing.
Jarden Wealth Limited is an NZX Advisory firm. A financial advice disclosure statement is available free of charge at jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement/.
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