By Gargi Pal Chaudhuri
The Ukrainian crisis has gripped the markets over the past month and has now worsened with Russia’s invasion of the country. Volatility metrics hit their highest level since the Delta variant shocked markets last fall1. That nervousness has translated into U.S. stocks in the red, Treasury yields across the curve as investors flock to safety and Brent crude oil topping $95 a barrel for the first time since 2014 – the same year Russia annexed Crimea2.
Our Global Geopolitical Risk Indicator BlackRock3, updated in mid-February, hit its highest level in more than a year amid heightened market attention to geopolitical competition. This is due to the market’s heightened awareness of conflict risks in all areas, including the Russia-NATO conflict.
With increased market volatility, what is the potential impact for investors? Some clues can be obtained by examining past geopolitical events. A key finding from our historical analysis4 asset price reactions to 68 risk events since 1962 is that the impact of geopolitical shocks has always tended to be more acute when the economic backdrop is weak, and therefore when economic growth has slowed from its 2021 peak in the world. In the mid-cycle environment of 2022, geopolitical risk could further amplify volatility, especially as high inflation and uncertain interest rate developments have deteriorated liquidity in most markets.
Our analysis of the six past geopolitical shocks, as shown in the chart, reveals that US Treasuries have tended to perform positively over a three-month horizon, even outperforming US equities in some cases, confirming their traditional ballast properties in a multi-asset portfolio. US equities and a diversified basket of commodities also tended to perform positively when measured over a three-month horizon, demonstrating the power of staying invested in strategic equity allocations during bouts of volatility. and the tactical utility of commodities as hedging and asset class diversification. .
In other words, the bottom line is that many investors are smart about staying put and not trying to time geopolitical events. However, for those who want to “reduce risk” or move into traditional safe havens like Treasuries or commodities to potentially build resilience in their portfolio, the ETF provides a flexible vehicle to make these sorts of moves. tactics. ETF trading volumes tend to increase with market risk, providing liquidity during periods of heightened volatility.
Performance of stocks, commodities and long-term treasury bills 3 months after geopolitical shocks
1 Source: Bloomberg, Chicago Board Options Exchange Volatility Index (VIX), November 1, 2021 – February 24, 2022.
2 Source: Bloomberg. Asset class performance measured by the following indices: US equities is the S&P 500 Index (SPX Index), from January 1, 2022 to February 24, 2022. Treasury is the Bloomberg US Treasury Index: 20+ Year Index (LT11TRUU index), January 1, 2022 to February 24, 2022. Brent crude oil is ICE Brent Futures from April 22, 2022, contract (CO1 Cmdty) from January 1, 2014 to February 24, 2022.
3 Source: BlackRock Geopolitical Risk Dashboard
4 Source: Gauging Geopolitics – A Framework for Assessing and Assessing Geopolitical Risk
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This post originally appeared on iShares Market Insights.