Geopolitical tensions have escalated recently as the US has increased its military presence in the Middle East ahead of a possible clash between Iran and Israel.
At the same time, Israel is expanding its evacuation orders and continuing its attacks in the southern Gaza Strip, while Ukraine’s recent incursion into Russia’s Kursk region was one of the largest since the war between the two countries began in 2022.
According to UBS strategists, market shocks caused by wars and geopolitical crises in the past have had only temporary effects on asset prices and long-term market growth.
While investors often feel the urge to sell due to immediate uncertainty, UBS believes that selling is usually counterproductive.
“The reason for this is that it would otherwise lock in temporary losses and limit investors’ ability to participate in the next market recovery,” UBS strategists said in a statement.
“Instead, we prefer strategies to improve portfolio resilience and maintain investments,” they added.
Specifically, UBS has outlined three strategies that investors can use to achieve this.
1) ‘Maintain a well-diversified portfolioAccording to UBS strategists, only by diversifying across different asset classes, regions and sectors can investors “effectively manage short-term risks while simultaneously increasing their wealth in the long term.”
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, delivers the strongest results.”
2) ‘Consider allocating to hedge funds:’ UBS also advises investors to consider the possibility of allocating to hedge funds.
The investment bank points out that hedge funds have historically demonstrated the ability to exploit tactical dislocations in various sectors and asset classes to generate alpha while maintaining strict risk limits.
“In our view, certain hedge fund strategies are indeed well suited to help investors navigate geopolitical changes and benefit from a turn in the interest rate cycle.”
3) ‘Use oil, oil and the Swiss franc as portfolio hedge:’ Finally, the strategists stressed that commodities – especially gold and oil – as well as currencies such as the Swiss franc can serve as effective portfolio hedges in times of escalating geopolitical tensions.
They see gold as an interesting investment opportunity, especially given concerns about geopolitical polarization, the US budget deficit and a potentially more aggressive interest rate cut by the US Federal Reserve.
“We expect gold prices to rise to $2,600 an ounce by year-end on strong demand from central banks, ETFs and safe-haven flows,” they said.
Meanwhile, oil prices are expected to rise to $87/barrel in the coming months as demand is good and OPEC+ is reluctant to inject additional supply into the market. Finally, the Swiss franc, traditionally considered a safe haven, should “continue to live up to its reputation” and continue to appreciate from its current levels, the UBS team said.
