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Hewison Insights

The impact of geopolitical tensions on markets

Chris Colman
Wealth Adviser
17 Jan 2024

War and conflicts on all scales bring with them high levels of tension and increased anxiety for all. Between the Ukraine war and now the Israel-Palestinian conflict, geopolitical events have been extremely prevalent in the past few years. Along with this, we have witnessed an increase in investor anxiety and market volatility, due to uncertainty in current conditions. However, history teaches us that equity markets do not suffer as expected during wars and conflict.

The bottom line is that wars have largely had minimal impact on overall market outcomes. In saying this, for large wars with catastrophic impact across broad regions, such as the Second World War, we saw that the financial markets fell in the period before the war but increased throughout the duration of the war. The war in Ukraine led to a 7% fall in the S&P 500 index in the beginning weeks, however, it recovered a month later and exceeded the market levels preceding the war. We have also seen a similar trend in the recent Israeli-Palestinian conflict.

The worst thing for market conditions is not war, geopolitics or even a recession, but the uncertainty that is created from these events, which then results in market volatility. With every news article about impending war and rising geopolitical risks, the market becomes increasingly uncertain about the outlook for the future.

The stock market typically prices in risks quickly and then focuses on the economic and business fundamentals of growth and earnings – the fundamentals of the markets – rather than the unpredictability of geopolitical winds. Of course, in the current Middle East conflict, the uncertainty lies in whether there will be an escalation into a broader regional war that may have a longer lasting impact. In this case, there may be significant effects on oil and other commodities, which in turn, will impact the trend in inflation and therefore interest rate policy, as seen from the Ukraine war.

In 2024 there will be no shortage of geopolitical risks to broader investment markets. These risks arise due to half the world’s population seeing 2024 elections including the EU, India, Russia, South Africa, and the US (potentially another divisive Biden vs Trump presidential election) as well as the ongoing conflicts in Ukraine and the middle east.

The key to any long-term strategy is never being in a position where you are forced to sell. This enables you to ride through any short-term volatility of a market.

History shows that time in the market is one of the only sure ways to safeguard your investment strategy. Furthermore, a diversified investment portfolio with exposure to other assets classes such as cash and fixed interest might even enable you to capitalise off other people’s fear and pick up some great opportunities when markets are down.