How to build a portfolio resistant to geopolitical risks? UBS highlights 3 strategies by Investing.com

Geopolitical tensions have recently intensified, with the US building up 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 strikes in the southern Gaza Strip, while Ukraine’s recent incursion into Russia’s Kursk region marked one of the largest since the two countries’ war began in 2022.

According to UBS strategists, market shocks from wars and geopolitical crises have historically only had temporary effects on asset prices and long-term market growth.

While investors often feel the need to sell because of 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,” strategists at UBS said in a note.

“Instead, we favor strategies to improve portfolio resilience and stay invested,” they added.

Specifically, UBS outlined three strategies that investors can use to achieve this.

1)’You have a well-diversified portfolioAccording to UBS strategies, only by diversifying across different asset classes, regions and sectors can investors “effectively manage short-term risks while growing long-term wealth.”

Diversification is seen as a way to reduce portfolio volatility, access multiple sources of returns, and avoid behavioral biases during uncertain times. Finally, UBS points out that “market timing, not market timing, is what delivers the strongest results.”

2) ‘Consider allocating 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 capture tactical dislocations across sectors and asset classes to generate alpha while adhering to strict risk limits.

“Indeed, certain hedge fund strategies are well positioned to help investors navigate geopolitical shifts and capitalize on a shift in the interest rate cycle, in our view.”

3) ‘Use gold, oil and the Swiss franc as portfolio hedgesFinally, strategists pointed out that commodities, primarily gold and oil, and currencies such as the Swiss franc can serve as strong portfolio hedges in times of escalating geopolitical tensions.

They see bullion as an interesting opportunity, especially in light of concerns about geopolitical polarization, the U.S. fiscal deficit and a potentially more aggressive Federal Reserve rate cut path.

“We see gold prices rising to $2,600/oz by the end of the year on strong demand from central banks, ETFs and safe-haven flows,” they said.

Meanwhile, oil prices are expected to rise to $87/bbl in the coming months due to healthy demand and OPEC+’s reluctance to add additional supply to the market. Ultimately, the Swiss franc, considered a traditional safe haven, “should continue to live up to its reputation” and appreciate above current levels, the UBS team said.