🌏 Is Your Portfolio Hedged Against Rising Geopolitical Risks?
Goldman Sachs’ latest client survey reveals geopolitics as the top threat to markets and the global economy this year. What are some of the biggest risks and how can you hedge against them?
đźš© Middle East Tensions
The region stands on the brink of a broader conflict that could potentially obstruct oil supplies, hinder global economic growth, and rekindle inflation.
Bloomberg, for example, estimates that in an extreme scenario where a direct conflict breaks out between Iran and Israel (or the US), one-fifth of global crude supply, as well as important trade routes, could be at risk.
That could push oil prices above $150 a barrel, shaving about 1 percentage point off global economic growth and adding 1.2 percentage points to global inflation.
What’s more, tensions in the Red Sea, which accounts for 12% of global trade, have led to a surge in shipping costs, putting upward pressure on inflation.
đźš© US Election Uncertainties
Trump has proposed a 10% minimum tariff on all imports if he’s elected. The move would lead to higher costs for American consumers and drive up inflation, which could lead to even higher interest rates to combat it.
If trade partners were to retaliate in kind, it could upset global trade while also shaving about 0.4% off US economic output, according to Bloomberg.
đźš© China-Taiwan & Russia-Ukraine Conflicts
The re-election of Taiwan's pro-independence party intensifies China-Taiwan tensions amid already low trust levels between the two.
Bloomberg estimates that an outbreak in war between the two nations would disrupt chip supplies, block trade routes, and lead to economic sanctions costing up to 10% of global economic output (dwarfing the impact of major shocks like the global financial crisis and the pandemic).
🛡️ How to Hedge Against These Risks?
Investors historically turn to a few reliable assets to protect their portfolios in times of geopolitical uncertainty: commodities (especially oil and gold), and the Swiss franc.
Escalating tensions in the Middle East could pose a big risk to oil supplies. So an obvious hedge against that scenario would be to invest in oil or even to buy long-dated, out-of-the-money call options on an oil ETF.
Gold and the Swiss franc, meanwhile, are both perceived as safe-haven assets and so they tend to do well during periods of geopolitical volatility.
Plus, gold tends to perform well during periods of rising inflation. This matters because trade disruptions and rising shipping costs due to attacks in the Red Sea pose genuine upside risks to inflation.
Another way to hedge against this scenario is via inflation-linked bonds, whose principal and interest payments rise with the rate of inflation.