How to invest for the new Cold War

As political tensions create instability, investors should make sure their portfolios are able to cope with nasty surprises

Vladimir Putin
(Image credit: 2014 AFP)

One thing you can say about the media in general is that it’s never good news. Happy stories don’t sell papers or generate clicks. But even accounting for that tendency, it’s fair to say that the geopolitical situation today feels wobblier than it has done in quite some time. There’s the rise of ever-more brutal incarnations of Islamic extremism in the Middle East; there’s the ongoing tension between China and Japan (more than half of Chinese people asked in a recent poll expect the two nations to go to war at some point); and, of course, there’s Russia, playing a game of cat-and-mouse with the West, all the while consolidating its grip on Ukraine.

Like natural disasters, war and revolution have a horrendous human cost; but from an investment perspective – like natural disasters – their impact often seems minimal. There have been many instances where war, or the prospect of war, has had little or no effect on stockmarkets. Since 1950, noted a recent JP Morgan Asset Management report, “with the exception of the Israeli-Arab war of 1973 (which led to a Saudi oil embargo against the US and a quadrupling of oil prices), military confrontations did not have a lasting medium- term impact on US equity markets”. Markets shrugged off the Falklands War, the Soviet invasion of Afghanistan, and America’s invasions of Grenada and Panama.

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