Geopolitical tensions have increased recently, with the US increasing its military presence in the Middle East in anticipation of a possible clash between Iran and Israel.
At the same time, Israel is expanding its evacuation orders as it continues attacks in the southern Gaza Strip, while Ukraine’s recent incursion into Russia’s Kursk region was one of the largest since the start of the war between the two countries in 2022.
According to UBS strategists, market shocks resulting from wars and geopolitical crises have historically had only temporary effects on asset prices and long-term market growth.
While investors often feel the urge to sell due to the immediate uncertainty, UBS believes that selling is usually counterproductive.
“This is because it locks in otherwise temporary losses and hinders investors’ ability to participate in the next market recovery,” UBS strategists said in a note.
“Instead, we favor strategies to improve portfolio resilience and stay invested,” she added.
UBS has specifically pointed out three strategies that investors can use to achieve this.
1)’Ensure you have a well-diversified portfolioAccording to UBS strategists, only by diversifying across different asset classes, regions and sectors can investors “effectively manage short-term risk while increasing their long-term wealth.”
Diversification is seen as a way to reduce portfolio volatility, access multiple sources of returns, and avoid behavioral biases in uncertain times. Ultimately, UBS emphasizes that “time in the market, not timing the market, produces the most powerful results.”
2) ‘Consider allocation to hedge funds:’ UBS also advises investors to explore an allocation to hedge funds.
The investment bank notes that hedge funds have historically demonstrated the ability to leverage tactical dislocations across sectors and asset classes to generate alpha while adhering to strict risk limits.
“Certain hedge fund strategies, in our view, are indeed well positioned to help investors navigate geopolitical shifts and benefit from a turn in the interest rate cycle.”
3) ‘Use gold, oil and the Swiss franc as portfolio hedgesFinally, strategists emphasized that commodities, especially gold and oil, and currencies like the Swiss franc can serve as powerful portfolio hedges in times of escalating geopolitical tensions.
They see the precious metal as an interesting opportunity, especially in light of concerns about geopolitical polarization, the US budget deficit and a potentially more aggressive path of interest rate cuts by the Federal Reserve.
“We see gold prices rising to $2,600/oz by year-end amid strong demand from central banks, ETFs and safe haven flows,” they said.
Meanwhile, oil prices are expected to rise to $87 per barrel in the coming months due to healthy demand and OPEC+’s reluctance to add additional supply to the market. Finally, the Swiss franc, considered a traditional safe haven, should “continue to live up to its reputation” and appreciate further from current levels, the UBS team said.
