Here’s how to protect yourself against larger geoeconomic risks: Read By Investing.com

With geopolitical tensions escalating and economic policy uncertainties rising, Citi Research has updated its Geoeconomic Risk Premium (GRP) model to provide strategic guidance for investors.

Citi’s proprietary GRP model, which measures the discount rate applied to global equities due to geopolitical and economic risks, has seen a significant increase recently.

“Geopolitical risks are back in the spotlight amid rising tensions in the Middle East and Ukraine, as well as the upcoming US presidential election and a potential slowdown in the US economy,” analysts at Citi Research said.

Although the Global Geopolitical Risk Index has declined recently, the Economic Policy Uncertainty Index, particularly in Europe, has been rising. This suggests growing concerns about economic stability, driven by potential US economic slowdowns and election uncertainties.

Historically, such conditions have contributed to increased economic uncertainty, which can have a negative impact on stock valuations.

Citi’s analysis shows that defensive sectors are particularly resilient during periods of heightened geo-economic risk. Sectors such as healthcare and consumer staples are better positioned to withstand both economic and geopolitical uncertainties.

Utilities also stand out as a strong hedge against geopolitical risks. On the other hand, cyclical sectors such as financials and real estate tend to be more negatively affected during these times.

Sensitivity to geoeconomic risks differs from country to country. Switzerland stands out as a safe haven, proving resilient to both economic uncertainty and geopolitical risks.

In contrast, Spain and Italy are more susceptible to economic uncertainties, while Germany and France face greater exposure to geopolitical risks.

The UK presents a more nuanced profile, with negative exposure to economic uncertainties but benefiting from geopolitical risks due to its energy sector.

Company size also plays a crucial role in navigating geo-economic turbulence. Large-cap stocks generally outperform mid- and small-caps during times of stress.

Their stability and diversified revenue streams provide a buffer against the volatility that smaller firms can experience.

To mitigate the impact of rising geo-economic risks, investors can consider several strategic adjustments. Allocating a larger portion of their portfolios to defensive sectors like health care, consumer staples and utilities can provide stability during uncertain times.

These sectors have historically demonstrated resilience to economic downturns and geopolitical tensions.

Diversifying investments in countries that are less exposed to geo-economic risks can also increase portfolio stability. Switzerland and Japan, for example, offer robust financial systems and political stability, making them attractive options for risk management.

Increasing exposure to large-cap stocks can further protect the portfolio. Large-cap stocks tend to offer better protection against geoeconomic shocks due to their financial strength and diversified operations.

Monitoring key economic and geopolitical indicators is essential. The Economic Policy Uncertainty Index and the Global Geopolitical Risk Index provide valuable insight into rising risks, enabling timely portfolio positioning adjustments.

While the energy sector can benefit from geopolitical risks, its performance during periods of economic uncertainty can be less favorable. Balancing energy investments with allocations to other defensive sectors can help manage overall portfolio risk.